Lee D. Weiss, Weiss Capital Real Estate Group, LLC v. Private Capital, LLC ( 2014 )

This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2012).
STATE OF MINNESOTA
IN COURT OF APPEALS
A13-2029
Lee D. Weiss,
Plaintiff,
Weiss Capital Real Estate Group, LLC,
Respondent,
vs.
Private Capital, LLC, et al.,
Appellants.
Filed August 25, 2014
Reversed and remanded
Peterson, Judge
Hennepin County District Court
File No. 27-CV-10-20197
Michael Paris, Nystrom, Beckman & Paris LLP, Boston, Massachusetts; and
Eric R. Sherman, Vernle C. Durocher, Jr., Dorsey & Whitney, LLP, Minneapolis,
Minnesota (for respondent)
Bruce G. Jones, Tyler A. Young, Faegre Baker Daniels LLP, Minneapolis, Minnesota
(for appellants)
Considered and decided by Peterson, Presiding Judge; Schellhas, Judge; and
Connolly, Judge.
UNPUBLISHED OPINION
PETERSON, Judge
In this appeal from the denial of their motion for judgment as a matter of law,
appellants argue that respondent’s conversion claim fails because it does not allege a tort
independent of the parties’ contract; in the absence of an independent tort, punitive
damages may not be awarded; and the evidence does not support the damages awarded
for breach of contract. We reverse and remand.
FACTS
Lee Weiss is a financial professional with more than 20 years of experience in the
financial-services industry. In June 2007, Weiss decided to invest in appellant Private
Capital, LLC, a real-estate-development company focused on properties in North
Carolina. Weiss formed respondent Weiss Capital Real Estate Group, LLC, for the
purpose of making the investment.
On June 28, 2007, Private Capital’s manager, appellant K. Scott Fischer, sent
Weiss an e-mail that states:
Attached is the Operating Agreement for Private Capital LLC
and Schedule A reflecting the future ownership. . . . To
confirm our conversation this morning, you will invest
$500,000 into Private Capital LLC which will entitle you to
1) a 25% return on that capital until it is repaid, and 2) 18% of
all profits on any Private Capital deals (other than Derbyshire,
which has its own separate arrangement).
Weiss read the attached Private Capital operating agreement, signed it, and sent it back to
Fischer. The operating agreement states:
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Without the consent of the Manager, no Member shall be
entitled to a return of its Capital Contributions except by way
of the distribution to it of assets upon the dissolution of the
Company pursuant to the provisions of this Agreement. No
interest shall be allocated to any Member on the amount of its
Capital Account.
On August 23, 2007, Weiss Capital wired $250,000 to Fischer. Fischer allocated
$75,000 of that amount to Vein Mountain, LLC, a landholding company for which
Private Capital was the developer, and $175,000 to Private Capital. At Fischer’s request,
Weiss agreed to advance an additional $750,000 to Private Capital as a loan. On
September 17, 2007, Weiss Capital wired $1 million to Private Capital’s bank account
($250,000 to complete the $500,000 equity investment and $750,000 for the loan).
Fischer allocated $500,000 of that amount as an equity stake in Vein Mountain and
$500,000 as an equity stake in Camp Creek, another company for which Private Capital
was the developer. Weiss admitted that he signed Camp Creek’s operating agreement
and a conditional guarantee to permit Camp Creek to obtain a loan, but he testified that
he signed the documents in his capacity as a partner in Private Capital.
In October 2008, Weiss received partnership tax statements for Vein Mountain,
Camp Creek, and Private Capital. The tax statements showed that Weiss Capital had a
$175,000 equity interest in Private Capital, a $925,000 equity interest in Camp Creek,
and a $550,000 equity interest in Vein Mountain. Weiss testified that he was surprised to
receive the tax statements for Vein Mountain and Camp Creek because he never agreed
to invest in those companies. Weiss testified that he was shocked that the tax statement
for Private Capital showed only a $175,000 investment in that company. Weiss sent a
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letter to Fischer stating that he disagreed with the allocation of profit, loss, capital, and
liability in the tax statements that he received.
Weiss and Weiss Capital brought this lawsuit against appellants alleging a breach-
of-contract claim against Private Capital and claims for unjust enrichment, conversion,
and fraud against Private Capital and Fischer. Weiss and Weiss Capital sought punitive
damages against both Private Capital and Fischer. The case was tried to a jury. The
district court granted appellants’ motion for a directed verdict on Weiss’s and Weiss
Capital’s claims that appellants fraudulently induced Weiss and Weiss Capital to invest in
Private Capital. The jury found Private Capital and Fischer liable to Weiss Capital for
conversion and awarded $500,000 in damages. The jury found that Private Capital
breached its contract with Weiss Capital and awarded $620,000 in damages. Before the
punitive-damages phase of trial, Weiss and Weiss Capital agreed that they would not
proceed with a punitive-damages claim against Private Capital. The jury awarded
$500,000 in punitive damages against Fischer.
Appellants moved for judgment as a matter of law (JMOL) on multiple grounds,
including that Weiss Capital was barred from seeking tort damages and there was no
evidence to support the damages award for the breach-of-contract claim. The district
court denied appellants’ motion and ordered judgment for Weiss Capital in the amount of
$620,000 against Private Capital for breach of contract, $500,000 against Private Capital
and Fischer on the conversion claim, and $500,000 against Fischer for punitive damages.
The district court awarded Weiss Capital $427,475 in attorney fees and $110,834 in costs
against Private Capital. Judgment was entered accordingly. This appeal followed.
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DECISION
This court reviews the district court’s denial of JMOL de novo. Bahr v. Boise
Cascade Corp., 766 N.W.2d 910, 919 (Minn. 2009). JMOL should be granted:
only in those unequivocal cases where (1) in the light of the
evidence as a whole, it would clearly be the duty of the
[district] court to set aside a contrary verdict as being
manifestly against the entire evidence, or where (2) it would
be contrary to the law applicable to the case.
Jerry’s Enters., Inc., v. Larkin, Hoffman, Daly & Lindgren, Ltd., 711 N.W.2d 811, 816
(Minn. 2006) (quoting J.N. Sullivan & Assocs., Inc. v. F.D. Chapman Constr. Co., 304
Minn. 334, 336, 231 N.W.2d 87, 89 (1975)); see also Glorvigen v. Cirrus Design Corp.,
796 N.W.2d 541, 549 (Minn. App. 2011), aff’d 816 N.W.2d 572 (Minn. Jul. 18, 2012).
In denying appellants’ motion for JMOL, the district court rejected appellants’ arguments
that Weiss Capital was barred from seeking tort damages and that there was no evidence
to support the damages awarded for the breach-of-contract claim.
I.
A party may not recover tort damages for a breach of contract, “except in
exceptional cases where the defendant’s breach of contract constitutes or is accompanied
by an independent tort.” Wild v. Rarig, 302 Minn. 419, 440, 234 N.W.2d 775, 789
(1975) (citations omitted); see also Glorvigen v. Cirrus Design Corp., 816 N.W.2d 572,
584 (Minn. 2012) (stating that “[b]ecause of the differences between tort and contract
actions, ‘[w]hen a contract provides the only source of duties between the parties,
Minnesota law does not permit the breach of those duties to support a cause of action in
negligence.’” (quoting United States v. Johnson, 853 F.2d 619, 622 (8th Cir. 1988)).
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“When the gravamen of the complaint is the breach of contract, the plaintiff may not
recover tort damages.” McNeill & Assocs., Inc. v. ITT Life Ins. Corp., 446 N.W.2d 181,
185 (Minn. App. 1989), review denied (Minn. Dec. 1, 1989). “The issue becomes
whether there is a breach of duty which is distinct from the breach of contract. . . . The
test is whether a relationship would exist which would give rise to the legal duty without
enforcement of the contract promise itself.” Hanks v. Hubbard Broad., Inc., 493 N.W.2d
302, 308 (Minn. App. 1992), review denied (Minn. Feb. 12, 1993). The existence of a
legal duty independent of the contract is a question of law, which is reviewed de novo.
Id. at 307.
“Conversion is the wrongful exercise of dominion or control over the property of
another.” Bates v. Armstrong, 603 N.W.2d 679, 682 (Minn. App. 2000), review denied
(Minn. Mar. 14, 2000). “Conversion may be established by proof of some act that
changes the character of the property or permanently deprives the owner of it.” Id.Weiss Capital’s conversion claim is that appellants changed Weiss Capital’s
$500,000 equity investment in Private Capital into equity in other entities. 1 To recover
tort damages for this claim, Weiss Capital needed to show that changing the character of
its equity investment in Private Capital breached a duty that arose from a relationship
between Weiss Capital and Private Capital, rather than from a contractual duty.
The district court concluded that, because changing the character of Weiss
Capital’s investment was a separate wrong independent of Private Capital’s contractual
1
The allegation in the second amended complaint is that “without Weiss’ knowledge or
consent, the defendants took $325,000 of Weiss’ $500,000 capital investment in Private
Capital and converted it into a capital investment in Camp Creek.”
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duty to pay Weiss Capital interest on its investment, 2 Weiss Capital’s conversion claim
was not barred. But the fact that changing the character of Weiss Capital’s investment
and failing to pay interest on the investment were separate, independent wrongs does not
mean that changing the character of the investment breached a duty that was independent
of the parties’ contract.
Weiss Capital has not identified any duty independent of the parties’ contract that
was breached by changing the character of its equity investment in Private Capital.
Section 6.2(a) of the operating agreement states that “[a] separate Capital Account shall
be maintained for each Member. Each Member’s Capital Account shall be (a) credited
with (i) the amount of money contributed by such Member . . . and (b) debited with
(i) the amount of money distributed to such Member.” Under this provision, appellants
had a duty to credit Weiss Capital’s capital account with $500,000, which was the
amount of money that Weiss Capital contributed to Private Capital. This duty was
separate from any duty to pay interest on the investment, but both duties arose from the
contractual relationship created by the operating agreement, not from some other
relationship.
Weiss Capital argues that appellants breached an independent legal duty to not
interfere with the property rights of another.3 But the specific property right that Weiss
2
We will address below whether Private Capital had a contractual duty to pay Weiss
Capital interest.
3
Citing Fawcett v. Heimbach, 591 N.W.2d 516, 518-19 (Minn. App. 1999), Weiss
Capital argues that pledging or disposing of another’s equity in a company is conversion,
even when the parties’ relationship is governed by a contract. But in Fawcett, this court
did not address whether the conversion was an independent tort distinct from any breach
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Capital claims that appellants interfered with is Weiss Capital’s right to have its $500,000
allocated as a capital investment in Private Capital. This right does not exist
independently from the operating agreement, and the gravamen of the conversion claim is
that Private Capital did not allocate Weiss Capital’s money as required under the
operating agreement, which is a breach-of-contract claim.
Weiss Capital may not recover tort damages by claiming that appellants interfered
with its property rights and simply ignore that the operating agreement is the source of
those rights. The test set forth in Hanks is that there must be a “legal duty without
enforcement of the contract promise itself.” 493 N.W.2d at 308. The only basis in the
record for concluding that appellants interfered with Weiss Capital’s property rights by
allocating part of the $500,000 to equity in entities other than Private Capital is that
appellants had a contractual duty under the operating agreement to allocate the $500,000
only to equity in Private Capital. Consequently, the duty to not interfere with the
property rights of another cannot be enforced without also enforcing the contractual duty.
We, therefore, reverse the denial of appellants’ motion for JMOL on respondent’s
conversion claim and remand for entry of judgment in appellants’ favor on that claim.
II.
Even if a contract is breached maliciously, punitive damages will not lie unless the
maliciousness constitutes an independent tort. Barr/Nelson, Inc. v. Tonto’s, Inc., 336
N.W.2d 46, 52-53 (Minn. 1983). Because Private Capital’s failure to allocate Weiss
of contract; the principal issue was the measure of damages for the conversion. Fawcett
does not support Weiss Capital’s argument.
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Capital’s $500,000 as a capital investment in Private Capital does not constitute an
independent tort, it will not support an award of punitive damages. We, therefore,
reverse the denial of Fischer’s motion for JMOL on respondent’s claim for punitive
damages and remand for entry of judgment in Fischer’s favor on that claim.
III.
Private Capital argues that the jury’s $620,000 damages award on Weiss Capital’s
contract claim should be reversed because no evidence supports the award. “In a breach
of contract action, [the plaintiff] has the burden of proving not only breach, but that
damages arose from the breach.” D.H. Blattner & Sons, Inc., v. Firemen’s Ins. Co. of
Newark, New Jersey, 535 N.W.2d 671, 675 (Minn. App. 1995), review denied (Minn.
Oct. 18, 1995). “The law does not require mathematical precision in proof of loss, but
only proof to a ‘reasonable, although not necessarily absolute, certainty.’” Leoni v.
Bemis Co., 255 N.W.2d 824, 826, (Minn. 1977) (quoting N. Petrochemical Co. v.
Thorsen & Thorshov, Inc., 297 Minn. 118, 125, 211 N.W.2d 159, 166 (1973)).
Weiss Capital claimed that Private Capital breached the parties’ contract when it
allocated as a capital investment in Private Capital only $175,000 of the $500,000 wired
to Private Capital and allocated the remaining $325,000 as an equity investment in
another entity. Private Capital contends that, because it is undisputed that Weiss Capital
owns an 18 percent interest in Private Capital, the only thing that would have been
different if this breach had not occurred is that Weiss Capital would have $500,000,
rather than $175,000, allocated to its Private Capital capital account. Private Capital
argues that because Weiss Capital presented no evidence that would have permitted the
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jury to calculate the pecuniary value of the difference between having $175,000 allocated
to its capital account and having $500,000 allocated to its capital account, the damages
award for breach of contract has no evidentiary basis in the record.
The district court rejected Private Capital’s argument that Weiss Capital needed to
present evidence of the loss caused by misallocating Weiss Capital’s $500,000 because it
reasoned that “[t]he jury’s verdict instead appears to be based on Exhibit 13. That exhibit
promised Weiss Capital 25% interest on $500,000, and $620,000 represents almost
exactly 25% interest between the time Weiss Capital deposited $500,000 and when this
suit occurred.”
Exhibit 13 is a June 28, 2007, email from Fischer to Weiss, which states:
Thanks for your time on behalf of Private Capital LLC.
Attached is the Operating Agreement for Private Capital LLC
and Schedule A reflecting the future ownership. . . . To
confirm our conversation this morning, you will invest
$500,000 into Private Capital LLC which will entitle you to
1) a 25% return on that capital until it is repaid, and 2) 18% of
all profits on any Private Capital deals (other than Derbyshire,
which has its own separate arrangement). Please contact me
with any questions.
The district court determined that the Private Capital operating agreement gave Fischer
the right to make investment decisions and agreements, “which the jury could have found
included the promise made in Exhibit 13.”
But construction of an unambiguous contract presents a question of law; a fact-
finder determines the terms of an ambiguous contract, but no such determination is
necessary for an unambiguous contract, such as Exhibit 13 and the Private Capital
operating agreement. Denelsbeck v. Wells Fargo & Co., 666 N.W.2d 339, 346 (Minn.
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2003). The district court’s speculation about the jury’s interpretation of the contract
terms is, therefore, misplaced.
Fischer’s email in Exhibit 13 does not promise to pay Weiss Capital interest on its
capital at the rate of 25%, as the district court found; it promises “a 25% return on that
capital until it is repaid.” The difference between “25% interest” and “a 25% return” is
explained by the provisions of the operating agreement attached to the email, which states
that “[n]o interest shall be allocated to any Member on the amount of its Capital
Account.”
The operating agreement defines several terms, as follows:
“‘Capital Contribution’ shall mean any contribution to the
capital of the Company in accordance with Section 6.1
hereof.”
“‘Unreturned Capital’ means, with respect to a Membership
Interest, the Capital Contribution made in exchange for or on
account of such Membership Interest, reduced by all
distributions made by the Company that constitute a return of
the Capital Contribution therefor.”
“‘Return’ means, with respect to a Membership Interest, an
amount accruing each day, like interest, on the then-
outstanding Unreturned Capital with respect to such
Membership Interest, at the rate of 25% per annum,
compounded annually.”
“‘Unpaid Return’ means as of any date, an amount equal to
the excess, if any of (a) the aggregate Return accrued on all
Membership Interests from the date of issuance through such
date, over (b) the aggregate amount of prior distributions
made by the Company in respect of accrued Return with
respect to all such Membership Interests pursuant to Section
6.4.
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Applying these definitions, Weiss Capital’s “Capital Contribution” to Private
Capital was $500,000. Until Weiss Capital receives a distribution from Private Capital
that constitutes a return of its “Capital Contribution,” its “Unreturned Capital” is
$500,000. And until Weiss Capital’s “Unreturned Capital” is reduced to zero, a “Return”
amount will accrue each day on the outstanding balance of its “Unreturned Capital” at the
rate of 25% per annum.
But this does not mean that Weiss Capital is entitled to receive interest of 25% per
year on its $500,000 investment. Instead, the accrued “Return” becomes “Unpaid
Return” until it is paid off by a distribution made pursuant to section 6.4 of the operating
agreement.
Section 6.4(a) states:
Distributions of Operating Proceeds, Capital Proceeds
and any other assets (with the fair market value of any assets
other than cash determined in good faith by the Manager)
shall be made to the Members as follows, at such time or
times as the Manager shall determine in its sole discretion:
(i) First, one-hundred percent (100%) to the
Members, pro rata in respect of their Membership
Interests, until the aggregate Unreturned Capital in
respect of the Membership Interests equals zero;
(ii) Second, one-hundred percent (100%) to
the Members, pro rata in respect of their Membership
Interests, until the aggregate Unpaid Return in respect
of the Membership Interests equals zero;
(iii) Thereafter, to the Members pro rata.
Thus, whether to make a distribution is solely within the discretion of the
manager, and, if the manager decides to make a distribution, the amount distributed is
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used first to reduce each member’s aggregate unreturned capital to zero and then to
reduce each member’s unpaid return to zero. Applying these principles to Weiss
Capital’s $500,000 means that, if Fischer decides to make a distribution, the amount
distributed will be used first to return to Weiss Capital its $500,000 and then to pay
Weiss Capital whatever return has accrued on its unreturned capital at the rate of 25% per
annum.
The accruing amount is not a sum that the company is required to pay to a member
as if it were interest. Instead, it is an amount to be paid under section 6.4 if the manager
decides to make a distribution. This means that Private Capital did not have a contractual
obligation to pay Weiss Capital interest on its $500,000. Weiss Capital may become
entitled to receive a 25% return on its investment if Private Capital is successful and the
manager decides to make a large enough distribution, but the evidence does not
demonstrate that it is entitled to receive 25% interest on its $500,000. We, therefore,
reverse the denial of appellants’ motion for JMOL on respondent’s breach-of-contract
claim and remand for entry of judgment in Private Capital’s favor on that claim.
IV.
Attorney fees were awarded under the operating agreement, which states:
Notwithstanding anything to the contrary in this
Agreement, in the case of any dispute between the Company
and any Member or Members, or between or among
Members, regarding enforcement or interpretation of this
Agreement, or any suit by the Company against any Member,
or by any Member against the Company or any other
Member, to enforce or interpret this Agreement, the
substantially prevailing party in such dispute or suit shall be
reimbursed by the other party or parties for the substantially
13
prevailing party’s reasonable costs and expenses incurred in
such dispute or action (including, without limitation, court
costs and reasonable attorney’s, expert witness’, accountant,
and other professional fees and expenses).
Because we have reversed the denial of appellants’ motion for JMOL on
respondent’s claims for conversion, punitive damages, and breach of contract, we reverse
the awards of costs and attorney fees and remand to permit the district court to award
costs and attorney fees to the substantially prevailing party.
Reversed and remanded.
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