BioConvergence, LLC, and Alisa K. Wright v. Julie Menefee ( 2018 )

FILED
Jun 01 2018, 7:39 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANTS ATTORNEYS FOR APPELLEE
Robert L. Burkart Darren A. Craig
Jean M. Blanton Michele Lorbieski Anderson
Ziemer Stayman Weitzel & Shoulders, Frost Brown Todd LLC
LLP Indianapolis, Indiana
Evansville, Indiana
IN THE
COURT OF APPEALS OF INDIANA
BioConvergence, LLC, and June 1, 2018
Alisa K. Wright, Court of Appeals Case No.
Appellants-Defendants, 53A04-1708-PL-1810
Appeal from the Monroe Circuit
v. Court
The Honorable Judith A. Stewart,
Julie Menefee, Special Judge
Appellee-Plaintiff. Trial Court Cause No.
53C01-1309-PL-1742
Brown, Judge.
Court of Appeals of Indiana | Opinion 53A04-1708-PL-1810 | June 1, 2018 Page 1 of 54
[1] BioConvergence, LLC (“BioConvergence”) and Alisa K. Wright (“Alisa”)
appeal the trial court’s January 12, 2017 order addressing summary judgment
and denying their request for attorney fees and the trial court’s July 14, 2017
order denying their claim for attorney fees. BioConvergence and Alisa raise
two issues which we consolidate and restate as whether the trial court clearly
erred or abused its discretion in denying their request for attorney fees. We
affirm.1
Facts and Procedural History
[2] Julie and Greg Menefee met Alisa and her husband, Lance, in 1992 and
became friends. BioConvergence, a service provider to the life sciences
industry, was organized in 2004 by Alisa, Lance, John Brooks, and Jeff
Schwegman, had its grand opening in April 2006, and had its first full year of
doing work in 2007. Since its inception, Alisa was a majority member of
BioConvergence. In October 2005, Greg accepted Alisa’s invitation to join
BioConvergence’s Board of Advisors. After joining the Board of Advisors,
Greg signed a confidentiality agreement on October 18, 2005.
[3] In late 2007, Alisa contacted Greg and asked if he and Julie would be able to
loan BioConvergence $400,000. Alisa told Greg and Julie that she had an
agreement with “Chase for a line of credit that they backed off of and so she
needed the money to be able to have operating capital for BioConvergence.”
1
On April 18, 2018, we held oral argument in Indianapolis. We thank counsel for their well-prepared
advocacy. We also compliment Judge Stewart on her thorough orders.
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Transcript Volume 4 at 96-97. On November 21, 2007, Alisa sent Greg an
email message, which stated in part: “As you and Lance are meeting later this
morning, you’ll want to take a look at this when you talk. This is a draft
valuation and Blue & Co is doing a review on it. Based on the discussion I had
with Blue, the valuation is in the ballpark.” Plaintiff’s Exhibit 60.
[4] On December 19, 2007, Alisa sent an email to Greg, which was addressed to
“Greg and Julie” and stated in part:
On behalf of the [BioConvergence] owners, we welcome you to
our group and appreciate your contributions as we go about
making [BioConvergence] a successful business venture!
The plans are for the Menefees to become owners in Jan 2008.
Until that time, they will help us meet short term cashflow needs
by loans under promissory notes. Some additional details and
action items are:
*****
3. Other
a. Greg and Julie to decide who will make the capital
contribution (Greg & Julie, Greg, Julie, Julie’s trust, etc.)
b. Current valuation of the company confirmed by Blue & Co,
BioC’s accounting firm, in December 2007 at $9,267,841 –
setting the new value per unit at $131.05.
c. $400,000 + $131.05/unit = 3052.39 B1 units or approximately
4% of the company (total could vary based on interest accrued
and how it is handled)
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Plaintiff’s Exhibit 68. In December 2007 and February 2008, Julie and Greg
loaned BioConvergence $400,000 evidenced by promissory notes which were
unsecured.
[5] On November 17, 2008, Julie, as the individual “in which Subscription is
made,” and Alisa, CEO of BioConvergence, entered into a
“BIOCONVERGENCE LLC CLASS B-1 UNIT SUBSCRIPTION
AGREEMENT” (the “Subscription Agreement”). Plaintiff’s Exhibit 9. The
agreement provided in part that Julie “subscribes for and agrees to purchase
3,333 Class B-1 Units of membership interest (the ‘Units’) of BioConvergence
LLC, an Indiana limited liability company (the ‘Company’), at a price of
$120.00 per Unit, for a total purchase price of $400,000.00 (the ‘Purchase
Price’).” Id.
[6] The Subscription Agreement states:
2. Representation and Warranties of Undersigned. The
undersigned hereby represents and warrants as follows:
(a) All information provided to the Company by the undersigned
is true and correct in all respects as of the date hereof.
(b) The undersigned has sufficient knowledge and experience in
business and financial matters to evaluate the merits and risks of
an investment in the Company.
(c) The undersigned has been afforded access to all material
books, records and contracts of the Company, and the
undersigned has had an opportunity to ask questions of and
receive answers from the Company, or a person or persons acting
on its behalf, concerning the terms and conditions of this
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investment; and all such questions have been answered to the full
satisfaction of the undersigned.
*****
(e) The undersigned understands that the sale of the Units has
not been registered under the Securities Act of 1933, as amended
(the “Securities Act”), or any state securities law in reliance on
an exemption therefrom for non-public offerings and further
understands that the sale of the Units has not been approved or
disapproved by the United States Securities and Exchange
Commission, or any other federal or state agency.
(f) The undersigned is acquiring the Units for the undersigned’s
own account, for investment purposes only, and not with a view
to the sale or other distribution thereof, in whole or in part, and is
aware that there are substantial restrictions on the transferability
of the Units. The undersigned must bear the economic risk of an
investment in the Units for an indefinite period of time because
the sale of the Units has not been registered under the Securities
Act, and therefore, the Units cannot be sold unless such sale is
subsequently registered under the Securities Act or an exemption
from such registration is available. The undersigned has no right
to require the Company to (i) register the Units under federal or
state securities law at any time, or join in any future registration,
or (ii) take the action required to make Rule 144 under the
Securities Act available for resale of the Units.
(g) The undersigned agrees that the Units purchased will not be
sold, transferred, pledged or hypothecated without registration
under the Securities Act and any applicable state securities laws,
or until the undersigned has obtained an opinion of counsel
satisfactory to the Company that such registration is not required
in connection with such transaction.
(h) The undersigned agrees that any certificate representing the
Units may contain the following legend:
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“THE SECURITIES REPRESENTED HEREBY
WERE ACQUIRED FOR INVESTMENT ONLY
AND NOT FOR RESALE, SUCH SECURITIES
HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAW
(COLLECTIVELY, THE “SECURITIES LAWS”).
SUCH SECURITIES MAY NOT BE SOLD,
ASSIGNED, TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS (1) THE SALE OF
SECURITIES IS FIRST REGISTERED UNDER
THE SECURITIES LAWS, OR (2) THE
COMPANY SHALL HAVE RECEIVED AN
OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT REGISTRATION
UNDER THE SECURITIES LAWS IS NOT
REQUIRED.”
The undersigned further agrees that the Company may issue stop
transfer instructions to its transfer agent (if any) or make a
notation to such effect on its appropriate records.
(i) The undersigned agrees that no commission or other
remuneration shall be paid to any person in connection with the
offer or sale of the Units.
(j) The undersigned falls within one or more of the categories
indicated below by the Subscriber’s initials next to each
applicable category (INITIAL ALL THAT ARE
APPLICABLE):
__√__ Individual $1,000,000 Net Worth Test. Any natural
person whose net worth, or joint net worth with that
person’s spouse, at the time of the Subscriber’s
purchase exceeds $1,000,000.
__√__ Individual $200,000 Income Test. Any natural
person who had an individual income in excess of
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$200,000 in each of the two most recent years or a
joint income with that person’s spouse in excess of
$300,000 in each of those years and who has a
reasonable expectation of reaching the same income
level in the current year.
_____ Other Persons. Persons not meeting any of the
above, but otherwise acceptable to the Company.
Not more than 35 such other persons may be
accepted.
The foregoing representations and warranties shall be true and
accurate as of the date hereof, and as of the date of delivery of the
Purchase Price to the Company and shall survive such delivery.
3. Representations and Warranties of the Company.
*****
5. Indemnification.
(a) The undersigned acknowledges that the undersigned
understands the meaning and legal consequences of the
representations and warranties contained in paragraph 2 hereof,
and he hereby agrees to indemnify and hold harmless the
Company and each director, officer, employee and agent thereof
from and against any and all loss, damage or liability due to or
arising out of breach of any representation or warranty of the
undersigned contained in this Subscription Agreement.
(b) The Company acknowledges that the Company understands
the meaning and legal consequences of the representations and
warranties contained in paragraph 3 hereof, and hereby agrees to
indemnify and hold harmless the undersigned and his heirs,
personal representatives and assigns from and against any and all
loss, damage or liability due to or arising out of breach of any
representation or warranty of the Company contained in this
Subscription Agreement.
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Id.
[7] In July 2012, Alisa called Greg and asked for Julie, but she was not there, and
Alisa told Greg that the unit value for BioConvergence had dropped to $15.50.
Greg received a power of attorney and requested documents from
BioConvergence.
[8] On August 12, 2013, Julie filed a complaint against BioConvergence and Alisa
asserting: Count I, injunction to compel production of corporate books and
records; Count II, securities fraud; Count III, fraud; and Count IV, breach of
fiduciary duty. Julie’s complaint alleged that facts common to all counts
included in part that Alisa, on behalf of BioConvergence, represented that the
value of the class B units was $120 per unit pursuant to a valuation prepared by
Blue & Company, LLC, but “[o]n information and belief, Blue & Company did
not prepare a valuation of [Julie’s] Class B Units.” Appellants’ Appendix
Volume 2 at 64.
[9] On December 8, 2014, Julie filed an amended complaint alleging: Count I,
securities fraud; Count II, fraud; and Count III, breach of fiduciary duty. With
respect to Count I, securities fraud, Julie cited Ind. Code § 23-19-5-1 and
alleged that BioConvergence and Alisa omitted to state a material fact
necessary in order to make the statements not misleading, Alisa knew the
valuation was not prepared by Blue & Company when she made the statement
to her, Alisa knew that Julie’s units were not worth $120 a unit when she sold
her 3,333.33 units for $400,000, and Julie relied on Alisa’s false statements
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when she purchased the class B units. With respect to Count III, breach of
fiduciary duty, Julie alleged that Alisa, as an officer and majority member in
BioConvergence, owed fiduciary duties to Julie, a minority member in
BioConvergence, and that Alisa breached her fiduciary duties by intentionally
misrepresenting the value of Julie’s units, intentionally misrepresenting that
Julie’s units were valued at $120 a unit by Blue & Company, and “willfully
mismanaging BioConvergence, among other breaches.” Id. at 73.
[10] On January 30, 2015, BioConvergence and Alisa filed an answer to Julie’s
amended complaint and a counterclaim which alleged that Julie breached the
Subscription Agreement. BioConvergence and Alisa denied that Alisa told
Julie that a valuation was prepared by Blue & Company. They asserted twenty-
one affirmative defenses. They also asserted a counterclaim alleging that the
Subscription Agreement included representations by Julie that she had access to
all BioConvergence records and the opportunity to ask questions concerning the
investment which were answered to her satisfaction and that she agreed to
indemnify BioConvergence and its officers, directors, agents, and employees
due to any breach of representation in the Subscription Agreement. They
asserted that on November 4, 2014, Julie testified in a deposition that her
“claims relating to her purchase of the [BioConvergence] B-1 Units in
November 2008 and her ownership thereof are based on information lacking
from [BioConvergence] in November 2008, that [BioConvergence] documents
available to her in November 2008 which she chose not to review were not
accurate and an alleged diminution of value of her [BioConvergence] B-1
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units.” Id. at 83. They asserted that, “[a]s a result of her actions and omissions,
Julie [] has breached the Subscription Agreement” and that they were “entitled
to relief under the Subscription Agreement including indemnity by Julie [] and
to recover their damages, including attorneys’ fees and expenses, incurred in
defending Julie[’s] Complaint as a result of Julie[’s] breach of the Subscription
Agreement.” Id.
[11] In her Supplemental Answers to Defendants’ Third Set of Interrogatories dated
June 1, 2015, Julie was asked to “[s]pecify in detail each fact upon which [she]
base[d] the allegation in Count III of [her] Amended Complaint that Alisa []
willfully mismanaged [BioConvergence], the person from whom [she] obtained
information concerning the same, and the date of each act or omission [she]
claimed constitutes willful mismanagement.” Id. at 189. Julie answered:
Answer:
[Julie] objects to this interrogatory as duplicative of questions
that were asked and answered by Julie Menefee and Greg
Menefee (in his capacity as Power of Attorney for Julie Menefee)
at their depositions in this matter. [Julie] further objects to this
interrogatory as seeking premature disclosure of expert opinions
from [Julie].
Supplemental Answer:
Subject to, and without waiving her objections, [Julie] states that
Alisa [] willfully mismanaged [BioConvergence] by
misrepresenting that [BioConvergence’s] accounting firm, Blue &
Co., performed valuations of [BioConvergence] that Blue & Co.
did not perform; setting the price of [BioConvergence] units
without a rational basis (For example, Alisa [] approved
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[BioConvergence’s] purchase of units from her husband, Lance
Wright in 2010 and 2011 for $140 per unit and sold the same
units to Kathy Eddy in 2010 and 2011 for $140 per unit, but only
paid Kathy Eddy $15.50 per unit when [BioConvergence] bought
back those same units from Kathy Eddy in 2012.); manipulating
[BioConvergence’s] financials to make it appear that
[BioConvergence] was profitable when it was not; failing to be
present at [BioConvergence’s] offices; failing to stay informed
about [BioConvergence’s] operations; failure to make decisions
regarding the direction of [BioConvergence]; paying above-
market rent to Great Oak Tree (a company that is partially
owned by Alisa []); withholding information from members of
[BioConvergence] about [BioConvergence’s] financial condition;
not holding annual member meetings; misrepresenting the
valuation of [BioConvergence] during member meetings; firing
key [BioConvergence] staff members without cause; filling all of
the positions on [BioConvergence’s] board of directors beyond
her own position with paid consultants; taking actions to alienate
[BioConvergence’s] major client Eli Lilly; and spending excessive
[BioConvergence] funds on attorneys’ fees.
Id. at 189-190.
[12] On July 17, 2015, BioConvergence and Alisa filed a motion for summary
judgment. On September 18, 2015, Julie filed a response in opposition to the
motion.
[13] On April 6, 2016, the trial court entered an order which states:
Plaintiff’s Motion for Summary Judgment on the Amended
Counterclaim for Breach of Contract and Defendants’ Cross
Motion for Summary Judgment on the Amended Counterclaim
as to Liability
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[I]n her complaint, Julie Menefee does not claim that prior to her
purchase of the units the Defendant failed to provide her with the
valuation or that Julie Menefee otherwise did not have access to
the records. In the Subscription Agreement, she does not
represent that she reviewed all of the available records. Her
claim that the valuation was fraudulent is not a breach of the
representations she made in Section 2(c) of the Subscription
Agreement.
Defendants also assert Julie Menefee breached her
representations in Section 2(c) of the Subscription Agreement by
claiming in her Amended Complaint that she relied on an alleged
representation that BioConvergence, LLC’s accounting firm
“prepared” the $120 valuation. Defendants argue Julie Menefee
had access to all BioConvergence, LLC records; through her
power of attorney she had received the $120 valuation; and she
was advised BioConvergence, LLC prepared the valuation and
the accountant only reviewed it. Consequently, Defendants
argue her claim that she relied on who prepared the valuation
rather than the valuation itself breaches Section 2(c) where she
represented she had access to the valuation and the opportunity
to review it and ask questions of BioConvergence, LLC or the
accountant.
Again, the court finds no genuine issue of material fact with
respect to this claim. In her complaint, Julie Menefee does not
claim that prior to her purchase of the units she did not have
access to the valuation nor that she did not have the opportunity
to review it or ask questions regarding the valuation. In the
Subscription Agreement she does not represent that she relied
only on the records she reviewed and/or were available to her.
Her claim that Alisa Wright represented to her that the
accountant prepared the valuation and that she relied on this
verbal representation does not constitute a breach of Section 2(c)
of the Subscription Agreement.
Defendants’ Motion for Summary Judgment on the Amended
Complaint
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Defendants assert Plaintiff’s fraud claims and breach of fiduciary
duty claim are not actionable as Plaintiff cannot rely on
expressions of opinion and because Plaintiff had access to all
information necessary to review the valuation methodology.
Defendants claim Plaintiff’s willful mismanagement claim fails
because Plaintiff is attempting to assert a derivative claim
without requisite authority and because she lacks evidence to
support the claim.
1. Count I Securities Fraud
In Count I of her complaint, Plaintiff alleges the Defendants
violated the Indiana Securities Act, I.C. 23-19-5-1 by informing
Plaintiff before her purchase of the units of BioConvergence,
LLC that the units were valued at $120 per unit by Blue & Co.,
LLC. Defendants first assert that because valuations and
opinions of value are not actionable, a representation as to who
prepared the valuation is not material and cannot form the basis
for a securities fraud claim. “Expressions of opinion cannot be
the basis for an action in fraud.” Wheatcraft v. Wheatcraft, 825
N.E.2d 23, 30-31 (Ind. Ct. App. 2005) (internal citation omitted).
Because statements of value are regarded as mere expressions of
opinion, Plaintiff cannot state a claim for actionable fraud based
upon Defendants’ representation regarding the units’ valuation.
Id. The court does not read Count I of the Amended Complaint
to assert a claim for securities fraud based on the Defendants’
alleged misrepresentation of the value of the BioConvergence,
LLC units, rather on the alleged misrepresentation that the
valuation was prepared by Blue & Co., LLC. However, to the
extent Count I may be read to assert a claim for securities fraud
based on the Defendants’ alleged misrepresentation of the value
of the BioConvergence, LLC units, Defendants are entitled to
summary judgment.
The court further finds, however, that Defendants are not entitled
to summary judgment on Count I to the extent it asserts a claim
for securities fraud based on the alleged misrepresentation that
the $120 valuation was prepared by Blue & Co., LLC. The court
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finds the Defendants have not met their burden on summary
judgment of establishing that this factual issue is not material
under the summary judgment standard or under the standard
applied to securities fraud claims.
Defendants also assert Plaintiff could not reasonably rely on any
representations because she had access to all BioConvergence,
LLC information and failed to conduct any due diligence in
assessing her investment in BioConvergence, LLC. Defendants
assert that liability under the securities laws exists only when
there is a substantial likelihood that the misrepresentation
significantly altered the total mix of information that the investor
possessed.
In general, a person relying on a representation, “is bound to use
ordinary care and diligence to guard against fraud; however, the
requirement of reasonable prudence in business transactions is
not carried to the extent that the law will ignore an intentional
fraud practice(sic) on the unwary.” Soft Water Utilities, Inc. v.
LeFevre, 308 N.E.2d 395, 398 (Ind. App. 1974). See also,
Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522 (7th
Cir. 1985). The Plaintiff claims such an intentional fraud,
claiming that Defendant Wright represented Blue & Co, LLC
had prepared the valuation when Ms. Wright knew the
representation to be false.
However, the courts in both LeFevre and Angelos recognized that
liability is not absolute even with an intentional
misrepresentation. The Seventh Circuit in Angelos recognized
three circumstances under which even lies are not actionable.
However, none of those circumstances have been shown to exist
in this case so as to warrant summary judgment. Defendants’
designated materials do not establish that any lie was
contradicted by written truthful information; that the alleged lie
or omission did not significantly affect the total mix of Plaintiff’s
information; or that the missing information was more readily
accessible to Plaintiff than to Defendant. See, Angelos, 762 F.2d
at 530. In LeFevre, the court noted that “[a] person has a right to
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rely upon representations where the exercise of reasonable prudence
does not dictate otherwise.” Soft Water Utilities, Inc. v. LeFevre, supra,
at 398, citing, Voorhees v. Cragun, 112 N.E. 826 (Ind. App. 1916)
(emphasis added.) The court finds that a genuine issue of
material fact exists as to whether Plaintiff’s asserted reliance on
Defendant Wright’s alleged intentional misrepresentation
occurred “where the exercise of reasonable prudence does not
dictate otherwise.” Id. Consequently, Defendants have not met
their burden on summary judgment.
Defendants also assert that Plaintiff’s securities fraud claim is
time barred. Pursuant to I.C. 23-19-5-9(g), Plaintiff was required
to bring her action for securities fraud within three years of
Plaintiff’s discovery of the violation. Defendants’ designated
materials do not establish that Plaintiff should have known of the
injury prior to July 2012 when Plaintiff was informed the value of
her units had dropped from $140 to $15.50. The action was
commenced within three years of July 2012. Defendants’ motion
for summary judgment on this issue is denied.
2. Count II Common Law Fraud
Count II of Plaintiffs’ [sic] Amended Complaint asserts common
law fraud based on the alleged intentional misrepresentation by
Defendant Wright that Blue & Co., LLC had prepared the $120
valuation. Count II also asserts that Defendant Wright knew the
units were not worth $120 when she sold them to Julie Menefee.
Similar to the securities fraud claim, the court finds that to the
extent Count II may be read to assert a claim for fraud based on
the alleged misrepresentation of the value of the
BioConvergence, LLC units, Defendants are entitled to summary
judgment, but that Defendants are not entitled to summary
judgment to the extent Count II asserts a claim for fraud based
on the alleged misrepresentation that the $120 valuation was
prepared by Blue & Co., LLC. Defendants have failed to
establish as a matter of law that the alleged misrepresentation by
Alisa Wright is not actionable nor that as a matter of law Plaintiff
was not entitled to rely on that representation.
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3. Breach of Fiduciary Duty
Count III of Plaintiffs’ Amended Complaint claims that Alisa
Wright, as an officer and majority member of BioConvergence,
LLC, owed fiduciary duties to Plaintiff as a minority member,
and that Defendant Wright breached this duty by intentionally
misrepresenting the value of the units, intentionally
misrepresenting that the units were valued at $120 by Blue &
Co., LLC, and willfully mismanaging BioConvergence, LLC. In
seeking summary judgment, Defendants assert that Defendant
Wright owed no fiduciary duty to Plaintiff prior to Plaintiff
becoming a minority member of BioConvergence, LLC.
Defendants also assert that as a matter of law, Alisa Wright did
not have the authority to act on behalf of BioConvergence, LLC
in her capacity as a member.
Plaintiff relies on the case of Fiederlein v. Boutselis, 952 N.E.2d 847
(Ind. Ct. App. 2011) to assert that Defendant Wright owed Julie
Menefee fiduciary duties as a potential member of a closely-held
limited liability company during negotiation of their
membership. However, in Fiederlein, the aggrieved party already
was a member of the LLC when negotiations in question were
conducted. Nothing in Fiederlein establishes a fiduciary duty to
potential members of a limited liability company. The court
finds as a matter of law that Defendant Wright owed no fiduciary
duty to Julie Menefee prior to Julie Menefee’s membership in
BioConvergence, LLC. Consequently, Defendant is entitled to
summary judgment on the breach of fiduciary duty claim to the
extent it is based on an alleged misrepresentation of the value of
units or who prepared the valuation prior to Julie Menefee
purchasing her Class B units on November 17, 2008.
Once Plaintiff became a member of BioConvergence, LLC, the
members were in a fiduciary relationship to each other and were
required to deal fairly, honestly, and openly with the company
and the other members. See, Riggin v. Rea Riggin & Sons, Inc., 738
N.E.2d 292, 307 (Ind. Ct. App. 2000); Barth v. Barth, 659 N.E.2d
559, 561 (Ind. 1995); Purcell v. Southern Hills Investment, LLC, 847
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N.E.2d 991, 997 (Ind. Ct. App. 2006) (holding “common law
fiduciary duties, similar to the ones imposed on partnerships and
closely-held corporations, are applicable to Indiana LLCs.”)
“This duty attaches to acts done in the capacity of a director,
officer, or shareholder.” Riggin, 738 N.E.2d at 307.
Consequently, Defendant Wright owed a fiduciary duty to
Plaintiff regardless of whether Defendant Wright was acting as
CEO or a member of BioConvergence, LLC.
Defendant Wright asserts Julie’s claim for breach of fiduciary
duty by willful mismanaging BioConvergence, LLC constitutes,
or can only be brought as, a derivative action, not a direct action.
However, the court finds Plaintiff’s claim states a direct action
and may be permissible. Our Indiana Supreme Court has
adopted the American Law Institute rule as follows:
In the case of a closely held corporation, the court in
its discretion may treat an action raising derivative
claims as a direct action, exempt it from those
restrictions and defenses applicable only to derivative
actions, and order an individual recovery, if it finds
that to do so will not (i) unfairly expose the
corporation or the defendants to a multiplicity of
actions, (ii) materially prejudice the interests of
creditors of the corporation, or (iii) interfere with a
fair distribution of the recovery among all interested
persons. A.L.I., Principles of Corporate Governance §
7.01(d).
Barth, supra, 659 N.E.2d at 562. Defendants have failed to show
as a matter of law that Plaintiff’s direct action is not permissible
in this case.
The court finds the Defendant has failed to establish an absence
of genuine issues of material fact regarding whether Defendant
Wright willfully mismanaged BioConvergence, LLC and that
summary judgment is not appropriate on the breach of fiduciary
duty claim regarding alleged willful mismanagement.
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IT IS THEREFORE ORDERED that Plaintiff’s Motion for
Summary Judgment on the Amended Counterclaim for Breach
of Contract is granted, and Defendants’ Cross Motion for
Summary Judgment on the Amended Counterclaim as to
Liability is denied.
IT IS FURTHER ORDERED that Defendants’ Motion for
Summary Judgment on Plaintiff’s Amended Complaint is
granted in part and denied in part. Defendants’ motion is
granted to the extent that Count I and Count II assert claims for
securities and common law fraud based on the Defendants’
alleged misrepresentation of the value of the BioConvergence,
LLC units. Defendants’ motion for summary judgment on
Counts I and II is denied in all other regards, including with
respect to claims for securities and common law fraud based on
Defendant Wright’s alleged misrepresentation that the $120
valuation was prepared by Blue & Co., LLC. Defendants’
motion for summary judgment on Count III is granted as to the
claim that Defendant Wright owed and breached any duty to
Plaintiff prior to Plaintiff’s membership in BioConvergence,
LLC, including any representation prior to such membership that
the units were valued at $120 per unit and that the valuation was
prepared by Blue & Co., LLC. Defendants’ motion for summary
judgment as to Count III is otherwise denied.
IT IS FURTHER ORDERED the court finds there is no just
reason for delay and hereby directs entry of judgment in favor of
the Plaintiff, Julie Menefee, and against the Defendants, Alisa
Wright and BioConvergence, LLC on Defendants’ Alisa Wright
and BioConvergence, LLC Counterclaim. Judgment is entered
in favor of Defendants, BioConvergence, LLC and Alisa Wright
on Plaintiff’s claims in Count I and Count II for fraud based on
the Defendants’ alleged misrepresentation of the value of the
BioConvergence, LLC units. Judgment is entered in favor of the
Defendant, Alisa Wright, and against the Plaintiff, Julie
Menefee, on the claim included in Count III that Defendant
Wright owed and breached any duty to Plaintiff prior to
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Plaintiff’s membership that the Class B units were valued at $120
per unit and that the valuation was prepared by Blue & Co.,
LLC.
Appellants’ Appendix Volume 2 at 93-99.
[14] On October 12, 2016, Alisa filed a motion for summary judgment on Count III
of Julie’s amended complaint. Alisa pointed to a transcript of a July 8, 2016
hearing, a deposition of Julie dated August 25, 2016, and other evidence. On
December 21, 2016, Julie filed a response in opposition to Alisa’s motion. On
January 3, 2017, Alisa filed a brief in reply to Julie’s response.
[15] On January 12, 2017, the court entered an order which states:
The court, having conducted a hearing on January 10, 2017 on
Defendant Alisa Wright’s Motion for Summary Judgment on
Count III of Plaintiff’s Amended Complaint, and having taken
the motion under advisement, now finds the motion should be
granted in part and denied in part.
Count III of Plaintiff’s Amended Complaint states a claim for
breach of fiduciary duty including willful mismanagement of
BioConvergence, LLC. The claim is asserted against Defendant
Wright as a member, director, and officer of the limited liability
company. The court now finds that Article 4, section 4.1 of the
applicable Operating Agreement of BioConvergence LLC, places
responsibility for the management of BioConvergence LLC
business with its Board of Directors. Section 4.5 grants specific
powers to the Chief Executive Officer, including executing leases
on behalf of the limited liability company. Consequently, while
Defendant Wright owed a fiduciary duty to other members
whether she was acting in her capacity as a member, officer, or
director, Defendant Wright’s liability for alleged mismanagement
of BioConvergence lies only in her capacity as director or officer.
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Consequently, the court now grants summary judgment in favor
of the Defendant, Alisa Wright on the portion of the breach of
fiduciary duty claim that asserts willful mismanagement against
her as a member and will proceed to address the claim as asserted
against Mr. [sic] Wright as a director and officer.
Plaintiff has identified fifteen bases for her claim of willful
mismanagement. At the hearing, it was discussed that it would
be beneficial to the efficient preparation for, and trial of, this case
if the court addressed each basis for the claim.
The court now grants summary judgment in favor of Defendant
Alisa Wright and against the Plaintiff, Julie Menefee, on Count
III of the Amended Complaint on each of the following bases for
breach of fiduciary claim:
• Manipulating BioConvergence LLC’s financials to make it
appear that the company was profitable when it was not;
• Failing to be present a [sic] BioConvergence LLC’s office’
[sic][;]
• Failing to make decisions regarding the direction of
BioConvergence LLC[;]
• Withholding information from members of
BioConvergence LLC about BioConvergence LLC’s
financial condition;
• Not holding annual member meetings;
• Firing key BioConvergence LLC staff members without
cause;
• Filling all of the positions on BioConvergence LLC’s
Board of Directors with paid consultants;
• Taking actions to alienate BioConvergence LLC’s major
client;
• Spending excessive BioConvergence LLC funds on
attorney fees; and
• Having Alisa Wright as the only Board member from
2008-2013.
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For each of these bases, even if the breaches were proven,
Plaintiff has failed to come forward with any designated
materials raising a genuine issue of material fact as to whether
she suffered damages as a result of these alleged breaches. There
has been no evidence indicating these actions caused Ms. Wright
[sic] damages.
The court also grants summary judgment in favor of Defendant
Alisa Wright and against the Plaintiff, Julie Menefee, on
Plaintiff’s claim for breach of fiduciary duty and willful
mismanagement for allegedly spending excessive
BioConvergence LLC funds on attorney fees. The claim for
excessive attorney fees relates to attorney fees spent by Defendant
Wright in defense of the very claim filed by Plaintiff and in
defense of a related action filed by the former CFO of
BioConvergence LLC. Plaintiff asserts Defendant Wright should
have settled these cases. Both cases remain pending, and any
claim for excessive attorney fees is premature as it is unknown at
this time who will prevail in the actions. On the claim for breach
of fiduciary duty for expending excessive attorney fees, proof of
damages and excessive attorney fees is an element of a claim that
must be proven before Plaintiff can prevail. Plaintiff has failed to
designate any materials showing potential entitlement to attorney
fees based on any conduct other than failing to settle the cases.
Such damages cannot be proved while the cases remain pending,
and summary judgment in favor of Defendant Wright is
appropriate. The court has bifurcated the remaining claims for
attorney fees on the Plaintiff’s fraud claims and Defendants’
breach of contract claim, and those will be heard if appropriate
following the jury trial.
Summary judgment also is granted in favor of Defendant Alisa
Wright and against Plaintiff Julie Menefee on Count III of the
Amended Complaint on the basis that Defendant Wright
misrepresented that BioConvergence LLC’s accounting firm,
Blue & Co., performed the $120 valuation prior to Plaintiff’s
purchase of BioConvergence LLC units in November 2008. As
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previously found by the court, Defendant Wright did not owe a
fiduciary duty to Plaintiff Menefee until Ms. Menefee became a
member of BioConvergence LLC. Consequently, any alleged
misrepresentation prior to Ms. Menefee’s purchase of the units is
not actionable as a breach of fiduciary duty. As to any such
alleged misrepresentation made or continuing after Plaintiff
became a member, the Plaintiff has failed to come forward with
any indication of damages she may have incurred by such
misrepresentation.
Summary judgment also is granted in favor of Defendant Alisa
Wright and against Plaintiff Julie Menefee on Count III of the
Amended Complaint on the basis that Defendant Wright set the
price of BioConvergence LLC units without a rational basis. In
many ways, this is the heart of the matter between these parties.
For a director or officer knowingly to set values on a company’s
units without any rational basis could well form the basis for a
claim of willful mismanagement and breach of fiduciary duty.
However, in this case, as the court understand [sic] the Plaintiff’s
claim, summary judgment is appropriate. There are three
primary valuations at issue: the $120 valuation set when Ms.
Menefee purchases her units; a subsequent $140 valuation; and
the later valuation of Plaintiff’s units at $15.50. It is the court’s
understanding that Plaintiff is not asserting the $15.50 price was
set without a rational basis as that price was based on the
analysis of Blue & Co. Rather, the court understands Plaintiff to
challenge the values of $120 and $140 as being without rational
basis. Again, because the $120 value was set prior to Defendant
Wright owing Plaintiff a fiduciary duty, any lack of rational basis
for that price cannot form the basis for a breach of fiduciary duty
claim. With respect to the $140 price, Plaintiff has failed to come
forward with any indication of how she may have been damaged
by this valuation. If the court has misunderstood the Plaintiff’s
claim, and her claim does include an assertion that the price of
$15.50 was set without a rational basis, counsel are respectfully
requested to notify the court and this portion of the summary
judgment order may be reconsidered.
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The court denies summary judgment on Count III of the
Amended Complaint on the basis that Defendant Wright
allegedly paid excessive rent to Great Oak Tree. First, the court
finds summary judgment is not appropriate based on the claim
being a derivative rather than direct action. The court agrees any
harm from this action generally would constitute injury to
BioConvergence LLC, not Plaintiff Menefee individually.
However, at this summary judgment stage, Defendant Wright
has failed to establish the inapplicability of the exception created
in Barth v. Barth, 659 N.E.2d 559 (Ind. 1995) allowing a member
of a limited liability company to pursue a direct action for harm
to the company under certain circumstances.
The closer question for the court is whether summary judgment
is appropriate on the excessive rent claim because Plaintiff
cannot prove damages or breach. Plaintiff has designated
materials that reflect varying amounts of rent were paid by
BioConvergence LLC to Great Oak Tree while [Alisa] was the
CEO, and at times only director, of BioConvergence LLC and
while Great Oak Tree was owned by Defendant Wright, her
parents, her sister and a trust. Between 2008 and 2014, annual
rent paid to Great Oak Tree varied from a low of $425,000 to a
high of $650,000. As noted by Plaintiff, when an owner, director
or officer of a company places her own interests in company
leases above the interests of the company, such action may
constitute a breach of fiduciary duty. However, Defendant
Wright came forward with deposition testimony from Plaintiff’s
husband taken in July 17, 2015, that he had not done an
assessment of BioConvergence LLC rent and the claim was
speculative. Plaintiff, however, has designated materials showing
what was paid in rent to Great Oak Tree. Neither Plaintiff nor
Defendant Wright have designated evidence establishing what
reasonable rent may have been. The court finds a genuine issue
of material fact exists as to whether the rent was reasonable.
As summary judgment was denied in part as to Count III,
Defendant Wright’s request for attorney fees is denied.
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Id. at 50-53.
[16] On January 23rd through the 26th of 2017, the court held a jury trial. The jury
found that BioConvergence and Alisa did not commit securities fraud, did not
commit fraud, and did not commit fraud that constituted criminal deception,
that Alisa did not breach the fiduciary duties she owed to Julie, and that Julie
breached the representation in section 2(b) of the Subscription Agreement that
she had sufficient knowledge and experience in business and financial matters
to evaluate the merits and risks of an investment in the company.
[17] On January 29, 2017, the court entered an order stating that the jury returned a
verdict in favor of the Defendants on all remaining claims in Julie’s amended
complaint and returned a verdict in favor of the Defendants and against Julie
on the Defendants’ counterclaim. The court accepted the jury’s verdict and
entered judgment in favor of the Defendants and against Julie on Julie’s
amended complaint. Appellants’ Appendix Volume 3 at 34. The court entered
judgment on the issue of liability in favor of the Defendants and against Julie on
the Defendants’ counterclaim for breach of contract, specifically, breach of
Section 2(b) of the Subscription Agreement. The order states: “The issues of
damages, indemnity and attorney fees relative to the Counterclaim are
bifurcated to be heard by the court, and a separate hearing date will be set.” Id.
[18] On February 28, 2017, Julie filed a motion to correct error. On March 27,
2017, BioConvergence and Alisa filed a brief in opposition to Julie’s motion.
That same day, the Defendants filed a Motion for Assessment of Damages on
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Counterclaim and for Entry of Judgment and a brief in support of the motion.
BioConvergence and Alisa also filed a Consolidated Motion for Attorneys’ Fees
Under Ind. Code § 34-52-1-1 and for Revision of Summary Judgment Order
under Trial Rule 54 as to Attorneys’ Fees. They requested that the court enter
an order awarding attorney fees and expenses in their favor in the amount of
$732,018.39.
[19] On May 19, 2017, Julie filed a Consolidated Reply in Support of Motion to
Correct Errors and for Judgment on the Evidence and Response to Motion for
Assessment of Damages. On May 31, 2017, Defendants filed a Reply Brief to
Plaintiff’s Consolidated Reply in Support of Motion to Correct Errors and for
Judgment on the Evidence and Response to Motion for Assessment of
Damages. That same day, Defendants also filed a Brief in Reply to Plaintiff’s
Opposition to Defendants’ Consolidated Motion for Attorneys’ Fees under Ind.
Code § 34-52-1-1 and for Revision of Summary Judgment under Trial Rule 54
as to Attorneys’ Fees.
[20] On June 16, 2017, the court held a hearing on the motions. On July 14, 2017,
the court entered an order which states:
The court conducted a hearing on June 16, 2017 on
Counterclaim Defendant Julie Menefee’s Motion to Correct
Errors and for Judgment on the Evidence; on Defendants’
Consolidated Motion for Attorneys’ Fees under I.C. 34-52-1-1
and for Revision of Summary Judgment Order Under Trial Rule
54 as to Attorneys’ Fees; and on Defendants/Counterclaimants’
Motion for Assessment of Damages on Counterclaim and for
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Entry of Judgment. Having taken the motions under
advisement, the court now finds as follows:
Counterclaim Defendant Julie Menefee’s Motion to Correct
Errors and for Judgment on the Evidence is denied.
With respect to Defendants/Counterclaimants’ Motion for
Assessment of Damages on Counterclaim and for Entry of
Judgment, the court finds the Defendants are not entitled to an
award of damages on the jury’s verdict in favor of defendants and
against the plaintiff on defendants’ counterclaim. The only
damages sought by defendants for breach of the subscription
agreement are attorney fees and costs incurred in defending
plaintiff’s complaint and in pursuing the counterclaim. Although
the elements of damage are limited, the amount of damages
sought is substantial, totaling $732,018.39. Of this figure, over
$686,000 is sought for attorney fees, and the balance for other
litigation expenses[.]
Under the “American Rule” each party generally is responsible
for her own attorney fees, and attorney fees are not recoverable
as damages in a breach of contract action absent a statute, rule or
agreement to the contrary. Flaherty & Collins v. BBR-Vision I, L.P.,
990 N.E.2d 958, 966 (Ind. Ct. App. 2013), citing, L.H. Controls,
Inc. v. Custom Conveyor, Inc. 974 N.E.2d 1031, 1046 (Ind. Ct. App.
2012[])[, trans. denied.] Under the American Rule, attorney fees
cannot be characterized as consequential damages in a breach of
contract action. [Dale] Bland Trucking, Inc. v. Kiger, 598 N.E.2d
1103, 1105 (Ind. Ct. App. Sept. 15, 1992), citing, Indiana Insurance
Co. v. Plummer Power Mower & Tool Rental, Inc., 590 N.E.2d 1085,
1093 (Ind. Ct. App. 1992). Indiana courts have recognized that
when a breach of contract causes the other party to “engage in
litigation with a third party and such action would not have been
necessary but for the breach, attorney fees and litigation expenses
may be awarded as breach of contract damages.” Flaherty, supra,
at 966. However, this exception is not available in a first party
action. Id.
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Counterclaimants rely on the indemnity provision in the
subscription agreement to provide the basis for recovery of fees.
That provision provides for the recovery of costs, but does not
specify attorney fees. Indemnity provisions are strictly construed.
Fresh Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1132 (Ind. 1995).
Although the counterclaimants cite cases in which attorney fees
were recoverable without a specific provision for recovery of
attorney fees, those cases initially involved third party claims for
which the indemnitor failed to indemnify the indemnitee. See,
Fort Wayne Lodge, L.L.C. v. EBH Corp., 805 N.E.2d 876 (Ind. Ct.
App. Apr. 6, 2004); Bethlehem Steel Corp. v. Sercon Corp., 654
N.E.2d 1163 (Ind. Ct. App. 1995)[, reh’g denied, trans. denied].
These cases are consistent with the rule in Flaherty, supra. The
action here, however, was a first party claim.
The indemnity provision in the subscription agreement does not
include language clearly stating the provision applies to first party
claims. “The general legal understanding of indemnity clauses is
that they cover ‘“the risk of harm sustained by third persons that
might be caused by either the indemnitor or the indemnitee. It
shifts the financial burden for the ultimate payment of damages
from the indemnitee to the indemnitor.’” L.H. at 1047 (quoting
Indianapolis City Market Corp. v. MAV, Inc., 915 N.E.2d 1013, 1023
(Ind. Ct. App. 2009)).” Flaherty, supra, at 967. “There is no
absolute prohibition against one party agreeing to indemnify the
other party for first-party claims arising between those parties. . .
. Where the plain language of the provision requires first-party
indemnification, then such indemnification is permitted. Sequa
Coatings Corp. v. N. Ind. Commuter Transp. Dist., 796 N.E.2d 1216,
1229 (Ind. Ct. App. 2003) (noting that [‘]the plain language[’]
expressly stated, among other things, [‘“]any and all Causes of
Action, as defined above, asserted by any parties and non-parties
to this Agreement[”’]), trans. denied.” Id. (other internal citations
omitted.)
The court recognizes that the applicability of an indemnity clause
to first party claims can be found, even without specific language
Court of Appeals of Indiana | Opinion 53A04-1708-PL-1810 | June 1, 2018 Page 27 of 54
encompassing first party claims, when the context of the
agreement makes it apparent such was the parties’ intent. See,
Fackler v. Powell, 891 N.E.2d 1091 (Ind. Ct. App. 2008)
(indemnity and hold harmless provision specifically providing for
recovery of attorney fees for breach of terms of dissolution
decree). However, the court does not find the language of the
subscription agreement to be such a clear case of the parties’
intent to cover first party claims. Although counterclaimants
may not have drafted the subscription agreement, they presented
it to the plaintiff and counterclaimants clearly were the parties
requiring execution of the agreement. As such, and construing
the agreement strictly, the court finds any ambiguity in the
agreement regarding whether it would apply to first party claims
must be construed against the counterclaimants. See, L.H., supra.
The court finds the subscription agreement, which document
contained neither a specific provision for recovery of attorney
fees nor clear language that it applied to first party claims, does
not permit counterclaimants to recover their attorney fees and
expenses incurred in defending the plaintiff’s action or incurred
in pursuing their counterclaim. Moreover, the court finds that
defendants/counterclaimants have failed to prove that the
attorney fees they incurred in defending the action and pursuing
their counterclaim were caused by plaintiff’s breach of section
2(b) of the subscription agreement.
The court denies the defendants’ Motion for Revision of
Summary Judgment Order Under Trial Rule 54 as to Attorney
Fees, which motion was consolidated with defendants’ Motion
for Attorneys’ Fees Under I.C. 34-52-1-1. The court further
denies defendants’ motion for Attorneys’ Fees Under I.C. 34-52-
1-1 with respect to all claims except plaintiff’s claim for treble
damages and attorney fees under I.C. 34-24-3-1.
Plaintiff argues the court’s denial of defendants’ motion for
summary judgment on Count II precludes a finding that pursuit
of the claim under the Crime Victims’ Act was frivolous or
groundless. However, neither the motion for summary judgment
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on Count II nor the court’s ruling on the motion addressed the
specific claim for damages under I.C. 34-24-3 nor any defense
that the misrepresentation had to be in writing. The court finds
its order denying defendants’ request for summary judgment on
Count II does not preclude a finding that pursuit of the claim for
damages under the Crime Victims’ Act was groundless.
In her amended complaint, plaintiff asserted a claim for securities
fraud, a claim for common law fraud, and a claim for breach of
fiduciary duty. In Count II, her claim for common law fraud,
plaintiff claimed she purchased her units in BioConvergence
based on defendant Wright’s intentional, false statement that the
units were valued at $120 a unit by Blue and Company; that
when defendant Wright made the representation, she knew the
valuation was not prepared by Blue and Company and knew the
units were not worth $120 a unit; and that plaintiff relied on the
false statements when she purchased her units. In her prayer for
damages for fraud, plaintiff sought compensatory damages,
attorney fees, punitive damages “along with treble damages and
attorneys’ fees pursuant [to] Indiana Code Sec. 34-24-3 et seq.”
Indiana Code Sec. 34-24-3-1 et seq., commonly referred to as the
Crime Victims’ Relief Act, permits recovery of treble damages,
costs and attorney fees when liability is established as a result of a
violation of I.C. 35-43; I.C. 35-42-3-3; I.C. 35-42-3-4; or I.C. 35-
45-9.4 [sic]. The only provision argued to be applicable in this
case was criminal deception a violation of I.C. 35-43-5-3(a)(2).
Criminal deception under I.C. 35-43-5-3(a)(2) requires proof that
a person knowingly or intentionally made a false or misleading
written statement with intent to obtain property, employment, or
an educational opportunity. Plaintiff consistently asserted that
the alleged misrepresentation she relied on prior to purchasing
her units was defendant Wright’s oral representation that Blue &
Co. prepared the $120 per unit valuation. Plaintiff never asserted
she relied on a written statement of any kind. At trial, plaintiff
did present evidence of written e-mails sent by [Alisa] to Greg
Menefee. Plaintiff’s Exhibit 60 was an e-mail sent by [Alisa] to
Court of Appeals of Indiana | Opinion 53A04-1708-PL-1810 | June 1, 2018 Page 29 of 54
Greg Menefee on November 21, 2007 attaching a draft valuation
of BioConvergence. The e-mail stated “Blue & Co is doing a
review on it. Based on the discussion I had with Blue, the
valuation is in the ballpark.” Plaintiff’s Exhibit 68 was an e-mail
sent by Ms. Wright to Greg Menefee’s e-mail address on
December 19, 2007. The e-mail was addressed to both Greg
Menefee and Julie Menefee. The e-mail welcomed Greg and
Julie Menefee to the Bio[C]onvergence group, noted the plan was
for the Menefees to become members in January 2008 and,
among other items, stated, “Current valuation of the company
confirmed by Blue & Co, BioC’s accounting firm, in December
2007 at [$XXX][2]:, setting the new value per unit at $131.05.” At
trial, the representative from Blue & Co. testified the firm worked
with Ms. Wright in reviewing certain figures and procedures
related to the valuation, but did not perform a “review” or
“valuation,” or “confirm” defendant’s valuation of
BioConvergence LLC as those terms are used in the accounting
profession.
Reliance is not an element of criminal deception, but it is for
common law fraud. Neither of these e-mails was ever presented
to or shared with Julie Menefee by Greg Menefee or otherwise.
Neither of the e-mails state that Blue & Co valued the units at
$120.00. Julie Menefee was not aware of these e-mails when she
purchased the units in BioConvergence, LLC, and Julie Menefee
did not directly rely on the written statements. However, Greg
Menefee had seen the e-mails, one of which was addressed to
Julie Menefee as well as Greg Menefee; the e-mails were sent
within months of Plaintiff’s purchase of the units and related to
the Plaintiff’s and Greg Menefee’s decision to become owners in
BioConvergence LLC; Greg Menefee did tell Julie Menefee that
he thought the purchase of the units at $120.00 would be a good
investment; and Greg Menefee testified that his opinion was
2
Bracketed text appears in trial court’s order.
Court of Appeals of Indiana | Opinion 53A04-1708-PL-1810 | June 1, 2018 Page 30 of 54
based in part on his trust of Alisa Wright, but also on his trust of
Blue & Co. Reasonable argument could be made that Julie
Menefee relied in part on Greg Menefee’s opinion of the
investment.
The question for the court is not whether these emails do in fact
constitute the “written statement” required for criminal
deception, but whether an argument that they do is frivolous,
unreasonable or groundless. It is a very close question for the
court, but the court concludes it cannot say the claim was
frivolous, unreasonable or groundless. Defendants’ claim for
attorney fees on this claim is denied as well.
Appellants’ Appendix Volume 2 at 55-59.
Discussion
[21] The issue is whether the trial court clearly erred or abused its discretion in
denying the request of BioConvergence and Alisa for attorney fees. Generally,
Indiana has consistently followed the American Rule in which both parties
generally pay their own fees. Loparex, LLC v. MPI Release Techs., LLC, 964
N.E.2d 806, 815-816 (Ind. 2012). In the absence of statutory authority or an
agreement between the parties to the contrary – or an equitable exception – a
prevailing party has no right to recover attorney fees from the opposition. 3 Id.
at 816. This case requires us to examine: (A) statutory authority; and (B) the
Subscription Agreement.
3
There are three well-established common-law exceptions to the American Rule: the “obdurate behavior”
exception, the “common fund” exception, and the “private attorney general” exception. Indiana embraces
the first two of these and not the third. Loparex, LLC, 964 N.E.2d at 816 n.5.
Court of Appeals of Indiana | Opinion 53A04-1708-PL-1810 | June 1, 2018 Page 31 of 54
A. Statutory Authority
[22] The Indiana General Assembly and the Indiana Supreme Court “have given the
courts of this state tools to deal with abusive litigation practices.” Zavodnik v.
Harper, 17 N.E.3d 259, 264 (Ind. 2014). Ind. Code § 34-52-1-1 is titled
“General recovery rule” and provides in part:
(b) In any civil action, the court may award attorney’s fees as part
of the cost to the prevailing party, if the court finds that either
party:
(1) brought the action or defense on a claim or defense that
is frivolous, unreasonable, or groundless;
(2) continued to litigate the action or defense after the
party’s claim or defense clearly became frivolous,
unreasonable, or groundless; or
(3) litigated the action in bad faith.
[23] In discussing a prior version of the statute, the Indiana Supreme Court stated
that the statute “strikes a balance between respect for an attorney’s duty of
zealous advocacy and ‘the important policy of discouraging unnecessary and
unwarranted litigation.’”4 Mitchell v. Mitchell, 695 N.E.2d 920, 924 (Ind. 1998)
4
The Court was examining Ind. Code § 34-1-32-1, which similarly provided:
(b) In any civil action, the court may award attorney’s fees as part of the cost to the
prevailing party, if it finds that either party:
(1) brought the action or defense on a claim or defense that is frivolous,
unreasonable, or groundless;
(2) continued to litigate the action or defense after the party’s claim or
defense clearly became frivolous, unreasonable, or groundless; or
(3) litigated the action in bad faith.
Court of Appeals of Indiana | Opinion 53A04-1708-PL-1810 | June 1, 2018 Page 32 of 54
(quoting Kahn v. Cundiff, 533 N.E.2d 164, 170 (Ind. Ct. App. 1989)).
“Subsections (b)(1) and (b)(2) of the statute focus on the legal and factual basis
of the claim or defense and the arguments supporting the claim or defense.” Id.
“In contrast, subsection (b)(3) – ‘litigated the action in bad faith’ – by its terms
requires scrutiny of the motive or purpose of the non-prevailing party.” Id. The
Indiana Supreme Court has held:
More precisely,
bad faith is not simply bad judgment or negligence.
Rather, it implies the conscious doing of a wrong because
of dishonest purpose or moral obliquity. It is different
from the negative idea of negligence in that it contemplates
a state of mind affirmatively operating with furtive design
or ill will.
Id. (quoting Watson v. Thibodeau, 559 N.E.2d 1205, 1211 (Ind. Ct. App. 1990)
(quoting Young v. Williamson, 497 N.E.2d 612, 617 (Ind. Ct. App. 1986), reh’g
denied, trans. denied)). The Court also explained:
This Court has observed in related contexts that the legal process
“must invite, not inhibit, the presentation of new and creative
argument” to enable the law to grow and evolve. Orr v. Turco
Mfg. Co., 512 N.E.2d 151, 153 (Ind. 1987) (setting forth standard
for punitive sanctions for frivolous appellate claims). To be sure,
application of the statutory authorization for recovery of
attorney’s fees . . . must leave breathing room for zealous
advocacy and access to the courts to vindicate rights. Kahn, 533
N.E.2d at 170. Courts must be sensitive to these considerations
and view claims of “frivolous, unreasonable, or groundless”
claims or defenses with suspicion.
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Id. at 925.
[24] Ind. Code § 34-52-1-1(b) “places an obligation on litigants to investigate the
legal and factual basis of the claim when filing and to continuously evaluate the
merits of claims and defenses asserted throughout litigation.” Landmark Legacy,
LP v. Runkle, 81 N.E.3d 1107, 1116-1117 (Ind. Ct. App. 2017) (quoting Gen.
Collections, Inc. v. Decker, 545 N.E.2d 18, 20 (Ind. Ct. App. 1989)). “A claim is
‘frivolous’ if it is made primarily to harass or maliciously injure another; if
counsel is unable to make a good faith and rational argument on the merits of
the action; or if counsel is unable to support the action by a good faith and
rational argument for extension, modification, or reversal of existing law.”
Kitchell v. Franklin, 26 N.E.3d 1050, 1057 (Ind. Ct. App. 2015) (citing Wagler v.
W. Boggs Sewer Dist., Inc., 980 N.E.2d 363, 383 (Ind. Ct. App. 2012), reh’g denied,
trans. denied, cert. denied, 134 S. Ct. 952 (2014)), trans. denied. “A claim is
‘unreasonable’ if, based on the totality of the circumstances, including the law
and facts known at the time, no reasonable attorney would consider the claim
justified or worthy of litigation.” Id. “A claim is groundless if no facts exist
which support the legal claim relied on and presented by the losing party.”
Purcell v. Old Nat. Bank, 972 N.E.2d 835, 843 (Ind. 2012). “However, the law is
settled that a claim is neither groundless nor frivolous merely because a party
loses on the merits.” Kitchell, 26 N.E.3d at 1057. “Bad faith is demonstrated
where the party presenting the claim is affirmatively operating with furtive
design or ill will.” Id.
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[25] “The trial court’s decision to award attorney’s fees under § 34-52-1-1 is subject
to a multi-level review: the trial court’s findings of facts are reviewed under the
clearly erroneous standard and legal conclusions regarding whether the
litigant’s claim was frivolous, unreasonable, or groundless are reviewed de
novo.” Purcell, 972 N.E.2d at 843 (citing R.L. Turner Corp. v. Town of
Brownsburg, 963 N.E.2d 453, 457 (Ind. 2012)). “[T]he trial court’s decision to
award attorney’s fees and any amount thereof is reviewed for an abuse of
discretion.” Id. “A trial court abuses its discretion if its decision clearly
contravenes the logic and effect of the facts and circumstances or if the trial
court has misinterpreted the law.” Id.
[26] BioConvergence and Alisa appear to argue that: (1) Julie’s claims were
frivolous because she abandoned most claims on summary judgment; (2) Julie’s
claim of excessive payments by BioConvergence was not recoverable because
such claim belonged to BioConvergence; (3) Julie’s claim related to criminal
deception was frivolous because there was no written statement; and (4) Julie’s
fraud and securities fraud claims were frivolous.
1. Julie’s Allegations
[27] BioConvergence and Alisa assert that Julie abandoned fourteen claims under
Count III after litigating them for three years and after Alisa designated
evidence on summary judgment proving that the factual and legal bases were
lacking.
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[28] Julie argues that BioConvergence and Alisa contend that she asserted fifteen
claims for breach of fiduciary duty and that the trial court entered summary
judgment against her on fourteen out of those fifteen claims, but that their
contention is false. She asserts that she alleged one claim for breach of
fiduciary duty against Alisa in Count III of the amended complaint. She claims
that BioConvergence and Alisa attempt to characterize that one claim as fifteen
separate claims by citing her answer to an interrogatory and her deposition
testimony about the interrogatory answer. She asserts that responses to
interrogatories are not claims and that, “[w]ere the Court to decide that all
statements in answers to interrogatories that a party did not pursue at trial were
‘frivolous claims,’ parties would be discouraged from ‘fully’ responding to
interrogatories.” Appellee’s Brief at 15. She asserts that such a result would
lead to violations of Ind. Trial Rules 265 and 336 and frustrate the discovery
process. She contends that, when she was asked to list the grounds upon which
she claimed a breach of fiduciary duty, she responded with all facts that she
believed could possibly support her claim. With respect to whether she
abandoned that claim, Julie argues that she filed an amended complaint
sufficient to place BioConvergence and Alisa on notice of her claims and later
determined that the best course was to pursue a claim against Alisa in her
5
Ind. Trial Rule 26 governs the scope of discovery and provides in part that “[p]arties may obtain discovery
regarding any matter, not privileged, which is relevant to the subject-matter involved in the pending action,
whether it relates to the claim or defense of the party seeking discovery or the claim or defense of any other
party . . . .” (Emphasis added).
6
Ind. Trial Rule 33 provides in part: “Each interrogatory shall be answered separately and fully . . . .”
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capacity as an officer and accordingly did not oppose Alisa’s request to enter
summary judgment with respect to Alisa’s role as a member.
[29] To the extent Julie abandoned assertions made in her discovery response, we
cannot say that such abandonment indicates that her claims were frivolous or
that she continued to litigate the action after her claim clearly became frivolous,
unreasonable, or groundless. We observe that, with respect to some of the
examples addressed in the brief of BioConvergence and Alisa, they do not cite
to the record for the argument that Julie abandoned claims. We also observe
that BioConvergence and Alisa do not respond to Julie’s argument that limiting
her discovery responses would have violated Ind. Trial Rules 26 and 33.
[30] With respect to their assertion that the trial court’s April 6, 2016 order found
that Alisa owed no fiduciary duty to Julie prior to her membership,
BioConvergence and Alisa argue, without citation to the record, that Julie
“continued to assert such claim in Count III, thereby, forcing Alisa to continue
to defend a claim the trial court had already rejected.” Appellants’ Brief at 24.
A review of the record reveals that Julie’s December 21, 2016 response in
opposition to Alisa’s motion for summary judgment on Count III stated in part
that “Alisa Wright made misrepresentations regarding who valued
BioConvergence’s units after Julie became a member of BioConvergence.”
Appellants’ Appendix Volume 2 at 222 (emphasis added).
[31] The record suggests at least some evidence with respect to other allegations.
With respect to manipulating financials, BioConvergence and Alisa cite to
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Julie’s August 25, 2016 deposition and assert that she admitted she had no
knowledge that any BioConvergence financial document was manipulated and
that no person advised her that Alisa manipulated any BioConvergence
financial document. The portion of Julie’s deposition cited by BioConvergence
and Alisa reveals an exchange in which Julie mentions a 2011 tape on which
Alisa and others discussed “maybe altering the rents or doing something to
make [BioConvergence] more profitable so they could get a line of credit.” Id.
at 137. She also mentioned that the “rents were certainly fluctuating,” that the
“fluctuation of the rents would make [BioConvergence] appear more
profitable,” and that “[w]hen the rents fluctuated, that’s a manipulation of the
financials . . . .” Id.
[32] As for Alisa’s alleged failure to be at BioConvergence’s offices, BioConvergence
and Alisa argue that Julie admitted she had no personal knowledge of Alisa’s
alleged failure to be present, claimed no specific damage relating to Alisa’s
failure to be at BioConvergence’s offices, designated no evidence or argument,
and abandoned this claim. The portion of Julie’s deposition cited by
BioConvergence and Alisa reveals that, when asked about Alisa’s failure to be
present, Julie mentioned “conversations with former employees saying she
wasn’t there a lot of the time.” Id. at 140. She testified that, while she did not
have personal knowledge that Alisa failed to be present at the offices, she would
rely on the testimony of “Kathy Eddy. Could be Lance. And I know Janet
and Kelly. Kelly Zaleski, Janet Carminati.” Id.
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[33] Based upon our review of the record, we cannot say that BioConvergence and
Alisa have demonstrated that there are no facts that support Julie’s allegations
or that reversal is warranted. See Purcell, 972 N.E.2d at 843 (“Although the
facts presented at trial were insufficient to survive judgment on the evidence, it
remains true that some facts were presented in Purcell’s case-in-chief. As
discussed above, it is likely that Purcell satisfied the quantitative aspect of the
sufficiency analysis by presenting facts that potentially lend support to his
conclusion. Thus, it cannot be said that ‘no facts’ existed in support of his legal
claim at the time Purcell went to trial. Based on this conclusion and on the
strong deference afforded to the trial court in these matters, we hold that the
trial court did not abuse its discretion in denying Old National’s request for
costs and attorney’s fees.”).
2. Claim of Excessive Payments as a Derivative Claim
[34] BioConvergence and Alisa argue that Julie’s claimed damages of excessive
payments were never recoverable because the claim belonged to
BioConvergence as a derivative suit. They point to the trial court’s findings in
its January 12, 2016 order that summary judgment was not appropriate based
on the claim being a derivative rather than a direct action because “at this
summary judgment stage, [Alisa] has failed to establish the inapplicability of the
exception created in Barth v. Barth, 659 N.E.2d 559 (Ind. 1995) allowing a
member of a limited liability company to pursue a direct action for harm to the
company under certain circumstances.” Appellants’ Appendix Volume 2 at 53.
BioConvergence and Alisa argue that this finding is clearly erroneous because
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“Alisa designated evidence of [Julie’s] repeated admission that she did not
assert a derivative claim but asserted only an individual claim for damages.”
Appellants’ Brief at 33 (citing Appellants’ Appendix Volume 2 at 68, 73, 240).7
They cite Purcell v. Southern Hills Investments, LLC, 847 N.E.2d 991 (Ind. Ct.
App. 2006), for the idea that a court in such a case does not consider the Barth
exception.
[35] Julie alleges that owners of closely-held companies are not always required to
bring claims of harm to the company as derivative actions. She argues that it
would have been futile to require her to make a demand on BioConvergence or
to attempt to convince BioConvergence to assert claims against Alisa because
Alisa was the sole director of BioConvergence at the time of the events alleged
in the lawsuit and when she filed the lawsuit.
[36] In Barth, the Indiana Supreme Court stated:
While we affirm the general rule requiring a shareholder to bring
a derivative rather than direct action when seeking redress for
injury to the corporation, we nevertheless observe two reasons
why this rule will not always apply in the case of closely-held
corporations. First, shareholders in a close corporation stand in a
fiduciary relationship to each other, and as such, must deal fairly,
honestly, and openly with the corporation and with their fellow
7
To the extent BioConvergence and Alisa assert Julie admitted that she did not assert a derivative claim, we
observe that Julie alleged in her August 2013 complaint that Alisa, as a majority shareholder, owed fiduciary
duties to her, a minority shareholder, and that she was damaged by Alisa’s breach of her fiduciary duties.
Julie’s amended complaint again alleged that she was damaged by Alisa’s breach of her fiduciary duties. In
her response in opposition to Alisa’s motion for summary judgment on Count III of her amended complaint,
Julie stated that she “properly asserted her claims in a direct action.” Appellants’ Appendix Volume 2 at 240.
Court of Appeals of Indiana | Opinion 53A04-1708-PL-1810 | June 1, 2018 Page 40 of 54
shareholders. W & W Equipment Co.,[ Inc. v. Mink,] 568 N.E.2d
[564, 570 (Ind. Ct. App. 1991), reh’g denied, trans. denied];
Krukemeier v. Krukemeier Machine and Tool Co., Inc. (1990), Ind.
App., 551 N.E.2d 885; Garbe v. Excel Mold, Inc. (1979), Ind. App.,
397 N.E.2d 296. Second, shareholder litigation in the closely-
held corporation context will often not implicate the policies that
mandate requiring derivative litigation when more widely-held
corporations are involved. W & W Equipment Co., Inc. v. Mink is a
leading case in this regard. There our Court of Appeals was
faced with a lawsuit filed by one of two 50% shareholders of a
corporation after the other shareholder joined with
nonshareholder directors to fire the plaintiff shareholder and
arrange for the payment of certain corporate assets to the other
shareholder. The court concluded that no useful purpose would
be served by forcing the plaintiff to proceed derivatively where
the policies favoring derivative actions were not implicated—
direct corporate recovery was not necessary to protect absent
shareholders or creditors as none existed. Id., 568 N.E.2d at 571.
Because shareholders of closely-held corporations have very
direct obligations to one another and because shareholder
litigation in the closely-held corporation context will often not
implicate the principles which gave rise to the rule requiring
derivative litigation, courts in many cases are permitting direct
suits by shareholders of closely-held corporations where the
complaint is one that in a public corporation would have to be
brought as a derivative action. See F. Hodge O’Neal & Robert B.
Thompson, O’Neal’s Close Corporations § 8.16 n. 32 (3d ed. & 1995
Cum. Supp.) (collecting cases); American Law Institute,
Principles of Corporate Governance: Analysis and Recommendations §
7.01, reporter’s n. 4 (1994) (collecting cases). However, it is
important to keep in mind that the principles which gave rise to
the rule requiring derivative actions will sometimes be present
even in litigation involving closely-held corporations. For
example, because a corporate recovery in a derivative action will
benefit creditors while a direct recovery by a shareholder will not,
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the protection of creditors principle could well be implicated in a
shareholder suit against a closely-held corporation with debt.
*****
In its recently-completed corporate governance project, the
American Law Institute proposed the following rule for
determining when a shareholder of a closely-held corporation
may proceed by direct or derivative action:
In the case of a closely held corporation, the court in its
discretion may treat an action raising derivative claims as
a direct action, exempt it from those restrictions and
defenses applicable only to derivative actions, and order an
individual recovery, if it finds that to do so will not (i)
unfairly expose the corporation or the defendants to a
multiplicity of actions, (ii) materially prejudice the
interests of creditors of the corporation, or (iii) interfere
with a fair distribution of the recovery among all interested
persons.
A.L.I., Principles of Corporate Governance § 7.01(d). We have
studied this rule and find that it is consistent with the approach
taken by our Court of Appeals and by most other jurisdictions in
similar cases and that it represents a fair and workable approach
for balancing the relative interests in closely-held corporation
shareholder litigation.
In determining that a trial court has discretion to decide whether
a plaintiff must proceed by direct or by derivative action, we
make the following observations, drawn largely from the
Comment to § 7.01(d). First, permitting such litigation to
proceed as a direct action will exempt the plaintiff from the
requirements of Ind. Code § 23-1-32-1 et seq., including the
provisions that permit a special committee of the board of
directors to recommend dismissal of the lawsuit. Ind. Code § 23-
1-32-4. As such, the court in making its decision should consider
whether the corporation has a disinterested board that should be
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permitted to consider the lawsuit’s impact on the corporation.
A.L.I., Corporate Governance Project § 7.01 comment e. Second, in
some situations it may actually be to the benefit of the
corporation to permit the plaintiff to proceed by direct action.
This will permit the defendant to file a counterclaim against the
plaintiff, whereas counterclaims are generally prohibited in
derivative actions. Also, in a direct action each side will
normally be responsible for its own legal expenses; the plaintiff,
even if successful, cannot ordinarily look to the corporation for
attorney’s fees. Id.
659 N.E.2d at 561-563 (footnotes omitted).
[37] In Purcell, which is cited by BioConvergence and Alisa, the Court discussed
Barth and commented that the Indiana Supreme Court “acknowledged that the
distinction between direct and derivative claims has been complicated in recent
years by recognition in many jurisdictions, including Indiana, of direct actions
by shareholders in closely-held corporations for derivative claims.” Purcell, 847
N.E.2d at 1001 (footnote omitted). In part, the court held that “insofar as [the
plaintiff] relies on the claim that [the defendant] violated his fiduciary duties to
[the plaintiff] as a Member of [a limited liability company], this is properly
asserted in a direct action because it is based upon rights and duties owed to
[the plaintiff], not [the limited liability company].” Id. The Court also stated
that “[b]ecause [the plaintiff was] asserting a direct claim addressing a harm in
its own name and not a derivative claim of corporate harm in the name of [a
limited liability company] under the guise of a direct claim, we do not need to
investigate whether the Barth exception is applicable.” Id.
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[38] Based upon the record, including that Alisa has been the majority member of
BioConvergence, we cannot conclude that the trial court abused its discretion
by declining to find that Julie’s claim regarding excessive payments was
frivolous based on the idea that she may have been required to file a derivative
claim and award attorney fees on that basis.
3. Criminal Deception
[39] BioConvergence and Alisa argue that Julie sought damages under the Crime
Victims Relief Act (“CVRA”) for criminal deception and assert that criminal
deception requires a written statement and yet the trial court found no written
statement that Julie relied upon, no written statement of which Julie was made
aware, and no written statement that any person communicated to her. They
assert that the Menefees each admitted that the only alleged representation
relied upon was oral. BioConvergence and Alisa assert that this Court should
reject the trial court’s reasoning that a plaintiff can reasonably assert a treble
damages claim for criminal deception based on a written statement known only
to a third party and which is not communicated to the plaintiff.
[40] Julie asserts that she presented evidence that Alisa engaged in criminal
deception. She argues that even if she did not rely directly upon the emails
Alisa sent to Greg, she could still maintain a claim for damages based on those
emails. In their reply brief, BioConvergence and Alisa argue that Julie confuses
reliance for a criminal conviction with causation for a civil CVRA claim when
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she argues that her civil CVRA claim cannot be frivolous because there is no
proof of reliance required for a criminal deception conviction.
[41] Ind. Code § 34-24-3-1 is referred to as the CVRA and is titled “Pecuniary loss as
result of property offenses” and provides in part:
If a person has an unpaid claim on a liability that is covered by
IC 24-4.6-5 or suffers a pecuniary loss as a result of a violation of
IC 35-43, IC 35-42-3-3, IC 35-42-3-4, or IC 35-45-9, the person
may bring a civil action against the person who caused the loss
for the following:
(1) An amount not to exceed three (3) times:
(A) the actual damages of the person suffering the
loss, in the case of a liability that is not covered by
IC 24-4.6-5; or
(B) the total pump price of the motor fuel received,
in the case of a liability that is covered by IC 24-4.6-
5.
(2) The costs of the action.
(3) A reasonable attorney’s fee.
[42] Ind. Code § 35-43-5-3 governs criminal deception and provides in part that “[a]
person who . . . knowingly or intentionally makes a false or misleading written
statement with intent to obtain property, employment, or an educational
opportunity . . . commits deception . . . .” The record reveals that Alisa sent
Greg, Julie’s husband, an email message on November 21, 2007, referencing a
“draft valuation” and stating that “[b]ased on the discussion [Alisa] had with
Blue, the valuation is in the ballpark.” Plaintiff’s Exhibit 60. Alisa sent another
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email message to Greg, which was addressed to “Greg and Julie” and provided
a valuation for the company “confirmed” by Blue & Co. Plaintiff’s Exhibit 68.
[43] The trial court’s order states:
The question for the court is not whether these emails do in fact
constitute the “written statement” required for criminal
deception, but whether an argument that they do is frivolous,
unreasonable or groundless. It is a very close question for the
court, but the court concludes it cannot say the claim was
frivolous, unreasonable or groundless.
Appellants’ Appendix Volume 2 at 59. We cannot say that the trial court erred
in concluding that Julie’s claim was not frivolous.
4. Fraud Claims
[44] BioConvergence and Alisa argue that Julie’s fraud and securities fraud claims
were based on the same alleged oral representation by Alisa that
BioConvergence’s accounting firm “prepared” the valuation. Appellants’ Brief
at 39. They assert that Julie knew when she filed her complaint that the alleged
oral representation that Blue & Company prepared the valuation was a false
allegation. Julie responds that she presented evidence that Alisa committed
securities fraud and fraud.
[45] Julie’s amended complaint cites Ind. Code § 23-19-5-1 under Count I, securities
fraud. That statute provides:
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It is unlawful for a person, in connection with the offer, sale, or
purchase of a security, directly or indirectly:
(1) to employ a device, scheme, or artifice to defraud;
(2) to make an untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statement made, in the light of the circumstances under
which they were made, not misleading; or
(3) to engage in an act, practice, or course of business that
operates or would operate as a fraud or deceit upon
another person.
Ind. Code § 23-19-5-1.
[46] The record reveals that Alisa sent Greg an email message on November 21,
2007, which stated in part: “As you and Lance are meeting later this morning,
you’ll want to take a look at this when you talk. This is a draft valuation and
Blue & Co is doing a review on it. Based on the discussion I had with Blue, the
valuation is in the ballpark.” Plaintiff’s Exhibit 60. Alisa’s December 19, 2007
email addressed to “Greg and Julie” stated in part: “Current valuation of the
company confirmed by Blue & Co, BioC’s accounting firm, in December 2007
at $9,267,841 – setting the new value per unit at $131.05.” Plaintiff’s Exhibit
68.
[47] The record further reveals a deposition of Brooks, which states in part that he
saw the November 21, 2007 email and that he did not believe that a review had
been done. Eddy testified that it had become fairly apparent that Blue &
Company had not done a certain valuation, Alisa asked her to look at the
valuation as the CFO of BioConvergence in October 2011, she found “there
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were a lot of problems,” she went through the records to try to figure out where
some of the numbers came from to try to justify the $140 value per unit “Alisa
had claimed for the previous valuation because she had said that had come
from Blue and Company,” but “[i]t was clear that it had not come from Blue
and Company.” Transcript Volume 5 at 131-132. We cannot say that the trial
court’s conclusion that Julie’s claim was not frivolous is erroneous or that it
abused its discretion.
B. Subscription Agreement
[48] BioConvergence and Alisa assert that the trial court erred in holding that the
Subscription Agreement did not allow indemnification for first party claims and
that they did not prove that the attorney fees were caused by Julie’s breach.
They argue that each party had first party indemnification relief against the
other in the event of a breach. They assert that the attorney fees sought relate to
the defense of Julie’s lawsuit and are recoverable for Julie’s breach under the
indemnification provision, and that recovery of attorney fees is allowed
regardless of whether the indemnity provision references attorney fees. They
acknowledge that “Indiana law is unsettled with respect to the recovery of
attorney fees in enforcing an indemnity provision which lacks specific attorney
fee language.” Appellants’ Brief at 46.
[49] BioConvergence and Alisa argue that this Court should hold that the
indemnification provision applies to first party claims and allows for
BioConvergence’s recovery of attorney fees in defending against Julie’s claims
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and enforcing the indemnity provision. They assert that BioConvergence was
damaged by Julie’s breach, and that BioConvergence could not have sold units
to Julie in a private placement without her representation that she had the
business acumen to evaluate the investment. They claim that “[b]ut for [Julie’s]
representation, she would not have become a [BioConvergence] investor and
would not have had an opportunity to file suit against [BioConvergence and
Alisa] relating to her [BioConvergence] investment.” Id. at 48. They conclude
that the trial court clearly erred in holding that they failed to prove that their
attorney fees were caused by Julie’s breach of the Subscription Agreement.
[50] Julie argues that the Subscription Agreement does not provide a basis for
awarding attorney fees. She asserts that the indemnity agreement does not
apply to first party claims. She argues that “[n]owhere does section 5(a), or any
other provision of the Agreement, state that [Julie] shall pay attorneys’ fees
incurred by [BioConvergence] or Alisa if [Julie] breaches the Agreement.”
Appellee’s Brief at 27. She states that Indiana follows the general rule that each
party must pay his or her own attorney fees. She also asserts that
indemnification clauses are strictly construed and the terms are required to be
clear and unequivocal.
[51] The court found that the Subscription Agreement, which “contained neither a
specific provision for recovery of attorney fees nor clear language that it applied
to first party claims, does not permit [BioConvergence and Alisa] to recover
their attorney fees and expenses incurred in defending the plaintiff’s action or
incurred in pursuing their counterclaim.” Appellants’ Appendix Volume 2 at
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57. The court also found that BioConvergence and Alisa “failed to prove that
the attorney fees they incurred in defending the action and pursuing their
counterclaim were caused by plaintiff’s breach of section 2(b) of the
subscription agreement.” Id.
[52] “[I]ndemnification clauses are strictly construed and the intent to indemnify
must be stated in clear and unequivocal terms.” Fresh Cut, Inc. v. Fazli, 650
N.E.2d 1126, 1132 (Ind. 1995). Indemnity agreements are subject to the
standard rules and principles of contract construction. Flaherty & Collins, Inc. v.
BBR-Vision I, L.P., 990 N.E.2d 958, 967 (Ind. Ct. App. 2013) (citing L.H.
Controls, Inc. v. Custom Conveyor, Inc., 974 N.E.2d 1031, 1047 (Ind. Ct. App.
2012)), trans. denied. Interpretation of a written contract, including an
indemnity provision, is a question of law. Id. We review questions of law de
novo and owe no deference to the trial court’s legal conclusions. Id.
[53] “The general legal understanding of indemnity clauses is that they cover ‘“the
risk of harm sustained by third persons that might be caused by either the
indemnitor or the indemnitee. It shifts the financial burden for the ultimate
payment of damages from the indemnitee to the indemnitor.”’” Id. (quoting
L.H., 974 N.E.2d at 1047 (quoting Indianapolis City Market Corp. v. MAV, Inc.,
915 N.E.2d 1013, 1023 (Ind. Ct. App. 2009))). The court in Flaherty stated:
As we noted in L.H., other authorities recognize this general
understanding. 974 N.E.2d at 1047-48 (citing Am. Jur. 2d 415,
Indemnity § 1 (2005) (“In general, indemnity is a form of
compensation in which a first party is liable to pay a second party
for a loss or damage the second party incurs to a third party”);
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C.J.S. 94, Indemnity § 1 (2007) (“In a contract of indemnity, the
indemnitor, for a consideration, promises to indemnify and save
harmless indemnitee against liability of indemnitee to a third
person or against loss resulting from such liability”)).
Id. “There is no absolute prohibition against one party agreeing to indemnify
the other party for first-party claims arising between those parties.” Id. “Where
the plain language of the provision requires first-party indemnification, then
such indemnification is permitted.” Id. (citing Sequa Coatings Corp. v. N. Ind.
Commuter Transp. Dist., 796 N.E.2d 1216, 1229 (Ind. Ct. App. 2003) (noting that
“the plain language” expressly stated, among other things, “‘any and all Causes
of Action, as defined above, asserted by any parties and nonparties to this
Agreement’”), clarified on reh’g, 800 N.E.2d 926, trans. denied). See also L.H.
Controls, Inc., 974 N.E.2d at 1048 (discussing Fackler v. Powell, 891 N.E.2d 1091
(Ind. Ct. App. 2008), trans. denied, observing that Fackler held that a husband
was required to pay his ex-wife’s attorney fees after his breach of a dissolution
property settlement agreement, which stated that each party agreed “to
indemnify and save and hold the other harmless from all . . . expenses
(including attorney’s fees) . . . incurred by reason of the indemnitor’s violation
or breach of any of the terms and conditions hereof,” Fackler, 891 N.E.2d at
1098, stating that “[i]t is clear that a divorce decree indemnity provision such as
the one in Fackler would cover a first-party indemnity claim, i.e. where one
party successfully sues the other for breach of contract and requests attorney
fees,” and concluding, “[h]ere, by contrast, the [agreement] does not mention
first-party claims.”).
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[54] In Zebrowski & Assocs., Inc. v. City of Indianapolis, By & Through its Bd. of Directors
for Utilities of its Dep’t of Pub. Utilities, which is cited by BioConvergence and
Alisa, the Court held: “An indemnitee, who incurs legal expenses through
defending an action against him for which he is entitled to indemnification, is
entitled to recover the expense of creating his defense, including reasonable
attorney fees.” 457 N.E.2d 259, 264 (Ind. Ct. App. 1983) (citing Employers’
Liability Assurance Corp. v. Citizens Nat’l Bank of Peru, 85 Ind. App. 169, 151 N.E.
396 (1926)). The Court held that “[t]he indemnitee may recover attorney fees
from the indemnitor incurred through an original action which is settled, and
also for the cost of prosecuting the indemnity clause.” Id. (citing Price v. Amoco
Oil Co., 524 F. Supp. 364 (S.D. Ind. 1981)). The Court also observed: “In the
present case, a specific provision for attorney fees is included in the indemnity
clause, and only recovery of fees concerning the original suit was requested.”
Id.
[55] In Dale Bland Trucking, Inc. v. Kiger, the Court commented on Zebrowski as
follows:
Bland argues that Zebrowski & Associates, Inc. v. City of Indianapolis
(1983), Ind. App., 457 N.E.2d 259, 264, supports its contention
that an indemnitee may recover attorney’s fees from the
indemnitor incurred in prosecuting the indemnity clause. The
Zebrowski court made such statement in dicta when citing a
federal case and did not apply the language to the case. Id.
Instead, the court stated that the indemnity clause for attorney’s
fees referred to recovery of fees concerning the original lawsuit
and not of the indemnity action. Id. Therefore, Zebrowski does
not support Bland’s contention.
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598 N.E.2d 1103, 1105 (Ind. Ct. App. 1992) (footnote omitted), trans. denied.
The Court stated: “We note that the federal case cited in Zebrowski was Price v.
Amoco Oil Co. (S.D. Ind. 1981), 524 F. Supp. 364. The Price court permitted an
award of attorney’s fees incurred in prosecuting the indemnity agreement
because the lease contained very specific language providing for such recovery.”
Dale Bland Trucking, Inc., 598 N.E.2d at 1105. The Court also rejected Bland’s
argument that the language “from any and all . . . suits, losses” included
attorney fees incurred in the prosecution of the indemnity action. Id. at 1106.
The Court held:
The indemnity clause in Zebrowski provided, “Contractor shall
defend, indemnify and hold harmless the Utility . . . from and
against all claims, damages, losses and expenses, including
attorney fees . . . .” Zebrowski, 457 N.E.2d at 262. The court
determined that the clause referred only to attorney’s fees
incurred in the underlying tort actions, and not the prosecution of
the indemnity clause. Id. at 264. Likewise, the indemnity clause
in the case at bar does not refer to the recovery of attorney’s fees
in the indemnity action. The trial court was correct in denying
an award for attorney’s fees incurred in the present litigation.
Id.
[56] We find the reasoning in Dale Bland Trucking instructive. Here, the indemnity
provision did not explicitly permit an award of attorney fees nor refer to the
recovery of attorney fees in an indemnity action. Accordingly, we cannot say
that reversal is warranted.
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Conclusion
[57] For the foregoing reasons, we affirm the trial court’s denial of attorney fees.
[58] Affirmed.
Baker, J., and Riley, J., concur.
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