Kelman v. Henry , 1998 MT 10N ( 1998 )

NO. 96-639
IN THE SUPREME COURT OF THE STATE OF MONTANA
1998 MT 10N
ZOLLIE KELMAN,
Plaintiff and Respondent,
vs.
CHARLES HENRY, allda CHUCK
HENRY, and ALLAN J. KOSMERL,
d/b/a B.J.B., INC. and H & K CASINO
Defendants and Appellants,
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable John W. Whelan, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Robert J. Emmons, Emmons & Sullivan, Great Falls, Montana
For Respondent:
Steven T. Potts, Jardine, Stephenson, Blewett & Weaver, Great Falls,
Montana; Curtis G. Thompson, Thompson & Jacobsen, Great Falls, Montana
Submitted on Briefs: April 10,1997
Decided: January 22, 1998
Filed:
Justice James C. Nelson delivered the Opinion of the Court.
71 Pursuant to Section I, Paragraph 3(c), Montana Supreme Court 1996 Internal
Operating Rules, the following decision shall not be cited as precedent but shall be filed as
a public document with the Clerk of the Supreme Court and shall be reported by case title,
Supreme Court cause number and result to the State Reporter Publishing Company and to
West Group in the quarterly table of noncitable cases issued by this Court.
72 This is an appeal from the Eighth Judicial District Court, Cascade County. On July
18, 1996, the District Court entered findings of fact, conclusions of law and a final judgment
in favor of Plaintiff Kelman. From this judgment, Defendants Henry and Kosmerl appeal.
We affirm.
73 We restate the following issues raised on appeal:
74 1. Did the District Court abuse its discretion by ordering Defendants Hen~y
and
Kosmerl to specifically perform the settlement agreements because such agreements were
illegal due to Evelyn's illegal ownership interest?
75 2. Did the District Court err in finding that Defendants Henry and Kosmerl
breached the settlement agreements by failing to pay Evelyn her portion of the salaries and
gaming machine rent?
76 3. Did the District Court err in concluding that Evelyn was entitled to one-third
of the rent paid from real estate she purchased from Defendant Kosmerl?
77 4. Did the District Court err in assessing Defendants Henry and Kosmerl with
their share of attorney fees incurred to obtain gambling and liquor license approval?
78 5. Did the District Court abuse its discretion by awarding Evelyn attorney fees?
79 6. Did the District Court abuse its discretion by denying Defendant Kosmerl's
motion to amend the judgment?
710 7. Did the District Court abusc its discrction by dcnying Defendants Henry's and
Kosmerl's Rule 6O(b), M.R.Civ.P., motion?
1 11 8. Should Defendants Henry and Kosmerl pay Kelman's attorney fees on appeal?
FACTUAL AND PROCEDURAL BACKGROUND
712 In 1989, Plaintiff Zollie Kelman (Zollic) filcd a complaint in thc Eighth Judicial
District Court, Cascade County, against Defendants Charles Henry (Henry) and Allan
Kosmerl (Kosmerl), alleging, among other things, a 50% ownership interest in B.J.B., Inc.,
d/b/a Nevada Sam's Casino. In 1991, a jury found that Zollie held a 50% ownership interest
in Nevada Sam's Casino. On November 25,1992, the lawsuit was settled and Zollie assigned
his interest in the lawsuit and settlement to his wife Evelyn Kelman (Evelyn). In settling the
lawsuit, the parties signed a Settlement Agreement, Shareholder Agreement, Partnership
Agreement and Contract for Deed (collectively, the settlement agreements). Pursuant to the
settlement agreements, the litigation was to be terminated and Evelyn was to acquire a one-
third ownership interest in both Nevada Sam's Casino and H & K Casino, in certain assets
used in connection with the casinos and in the real estate upon which the casinos were
located.
113 Pursuant to a stipulation signed by the parties, the District Court dismissed Zollie's
complaint. However, the District Court subsequently modified its order of dismissal to retain
jurisdiction until the appropriate licenses were issued to the parties. On June 8, 1995, the
Gambling Control Division of the Montana Department of Justice informed the parties that
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their gambling license applications had been approved. On June 21, 1995, Zollie petitioned
the District Court for specific performance of the settlement agreements. Thereafter, on
December 8, 1995, pursuant to Zollie's Rule 6O(b)(6) motion, the District Court vacated its
previous order of dismissal.
114 On January 31, 1996, the District Court entered findings of fact, conclusions of law,
and an order in which it ordered Henry and Kosmerl to specifically perform the settlement
agreements. On July 18, 1996, the District Court entered additional findings of fact,
conclusions of law and a final judgment in which it ordered Henry and Kosmerl to pay
Evelyn specified amounts of damages for their breach of the settlement agreements.
Subsequently, the District Court denied both Kosmerl's Rule 52(b), M.R.Civ.P., motion and
Henry's and Kosmerl's Rule 6O(b), M.R.Civ.P., motion. From the District Court's final
judgment as well as the court's denial of the two post-judgment motions, Henry and Kosmerl
appeal.
DISCUSSION
715 1. Did the District Court abuse its discretion by ordering Defendants Henry
and Kosmerl to specifically perform the settlement agreements because such
agreements were illegal due to Evelyn's illegal ownership interest?
116 Henry and Kosmerl argue that the District Court erred in ordering them to specifically
perform the settlement agreements at issue because the agreements were illegal. Specifically,
they assert that Zollie's ownership interest in Nevada Sam's Casino, which is currently
Evelyn's ownership interest, was illegal because it was derived from Bernard J. Black, who
during his ownership, deliberately violated liquor and gaming statutes. Because of this
illcgality, Henry and Kosmcrl arguc that the subsequent settlement agreements are
unenforceable.
717 We agree with Zollie that Henry and Kosmerl are barred from raising this claim of
invalidity concerning the settlement agreements. While Henry and Kosmerl did assert
numerous affirmative defenses to Zollie's lawsuit, including the illegality of Zollie's
ownership interest, they later signed a Settlement Agreement which rendered their
affirmative defense of illegality moot. We note that within the Settlement Agreement Henry
and Kosmerl agreed to a compromise in the entire matter by permitting Evclyn to bccome
an owner of the casinos and property and by generally agreeing to end the litigation and
specifically waiving any claims of invalidity concerning the settlement agreements. In fact,
the Settlement Agreement expressly provides in part:
8. Waiver of Claims of Invalidity
The parties specifically waive any claims that this agreement and any
documents executed pursuant to this agreement, are invalid on the basis of any
assertions, opinions or rulings by any licensing agency or Court of the State of
Montana, including but not limited to, any claims that Zollie lacks capacity
to enter into this agreement due to any agreements Zollie made with the State
of Montana as a result of his misdemeanor charges. [Emphasis added.]
718 Because Henry and Kosmerl were parties to the Settlement Agreement, their
affirmative defenses merged into the settlement, and, consequently, they are barred from
raising a claim of invalidity. See 15A C.J.S. Compromise & Settlement 9 25 (1967).
Consequently, because Henry and Kosmerl's claims of invalidity are barred, we will not
address this issue further. Accordingly, we hold that the District Court did not abuse its
discretion when it ordered Henry and Kosmerl to specifically perform the settlement
agreements at issue.
119 2. Did the District Court err in finding that Defendants Henry and Kosmerl
breached the settlement agreements by failing to pay Evelyn her portion of the salaries
and gaming machine rent?
120 On November 25,1992, the parties signed four settlement agreements which included
a Shareholder Agreement and a Partnership Agreement, both setting forth that no owner was
entitled to receive any payment or distribution unless all three owners were included.
Specifically, the Shareholder Agreement provides:
PART SIX
Unless otherwise agreed in writing by all of the shareholders, no
shareholder or director shall be entitled to any benefit, salary, wage, or other
payment or distribution in excess of any amount paid or distributed by, on
behalf of, or from B.J.B., Inc. to all of the other shareholders.
Similarly, the Partnership Agreement provides:
PART TEN
Unless otherwise agreed in writing by all of the partners, no partner
shall be entitled to any benefit, salary, wage, or other payment or distribution
in excess of any amount paid or distributed by, on behalf of, or from the
partnership to both of the other partners.
721 The District Court concluded that the parties' settlement agreements were effective
on November 25, 1992, the date the parties executed the agreements. Consequently, the
District Court found that Henry and Kosmerl had breached these agreements by failing to pay
Evelyn her portion of the wages and gaming machine rent in 1993 and 1994 as well as by
failing to obtain Evelyn's consent for their receipt of wages and rent in 1993 and 1994.
Therefore, the District Court ordered Henry and Kosmerl to pay Evelyn her share of the
salaries and gaming machine rent.
722 Henry and Kosmerl argue that the District Court erred in awarding Evelyn damages
for unpaid wages and rent based on its findings that the settlement agreements had a
"retroactive" effective date ofNovember 25,1992, and that Henry and Kosmerl had breached
the settlement agreements. Relying on certain 1991 statutes and administrative rules which
control gambling liccnsc applications, Hcnry and Kosmcrl asscrt that although the settlement
agreements expressly provided that they were effective immediately upon execution
Wovember 25, 1992), these contracts were not effective until approved by the Department
of Justice on July 1, 1995. See Title 23, Part 5, MCA, and 23.16.1 15-119, ARM. Therefore,
Henry and Kosmerl argue that because under these statutes and administrative rules Evelyn
did not have a legal ownership interest in either casino until July 1, 1995, no breach of
contract could occur and no damages could accrue based on their decision to pay themselves
salaries and gaming machine rent without Evelyn's consent prior to July 1, 1995.
123 This argument is without merit. While the statutes and administrative rules cited by
Henry and Kosmerl do govern gambling license applications and set forth that the operation
of a gambling establishment without a license constitutes a misdemeanor, they do not govern
the legality of contracts. Therefore, in this case, the fact that the casinos were not issued
permanent gambling licenses until July 1, 1995, did not change the fact that Evelyn, Henry
and Kosmerl all became owners of the casinos on November 25,1992, when they signed and
executed the settlement agreements. See Taurman v. Town of Cascade (1981), 192 Mont.
529,532, 629 P.2d 226,228 (holding that a public contractor licensing statute did not make
an unlicensed public contractor's contract with a city unenforceable or void, but rather made
it unlawful for him to "act in the capacity of a public contractor").
724 Furthermore, while Evelyn was prohibited from receiving any money until the
gambling license was approved, Henry and Kosmerl could have placed any salaries or rents
owcd to hcr in cscrow pending compliance with the gambling licensc application provisions.
See e.g. 23.16.1 18, ARM. Yet, while Henry and Kosmerl continued to pay themselves over
$200,000 during this period of time, they made no attempt to reserve Evelyn's portion of the
salaries and gaming machine rent in an escrow account or in any other way prior to receiving
approval on their gambling license applications, despite having signed the settlement
agreements at issue.
725 We conclude that the District Court's findings that the settlement agreements were
effective November 25, 1992, and that Henry and Kosmerl breached the settlement
agreements by paying themselves over $200,000 in salaries and gaming machine rent and
failing to pay Evelyn her share is supported by substantial evidence and is not clearly
erroneous. Rule 52(a), M.R.Civ.P. Accordingly, we hold that the District Court properly
awarded Evelyn her portion of the salaries and gaming machine rent in 1993 and 1994.
726 3. Did the District Court err in concluding that Evelyn was entitled to one-
third of the rent paid from real estate she purchased from Defendant Kosmerl?
127 The District Court found that Kosmerl breached the contract for deed that he had
entered into with Evelyn concerning the real estate upon which the casinos were located by
refusing to proceed with closing and performance of the contract for deed. Based on this
finding, the District Court awarded Evelyn her one-third share of the rent generated from the
real property since November 25, 1992. Kosmerl argues that the District Court erred in
awarding Evelyn these damages.
728 Again, as discussed in Issue 2, Kosmerl asserts that the "proposed" real property sale
agreement was subject to the approval of the Gambling Control Division pursuant to 5 23-5-
118, MCA, and that because the gambling license application was not approved until July
1, 1995, Evelyn had no equitable interest in the property prior to approval, and, therefore,
was not entitled to any rents generated from the real property prior to July 1, 1995.
Furthermore, Kosmerl contends that the District Court erred by severing the contract for deed
from the other three settlement agreements to find that Kosmerl had breached the contract
for deed.
729 This argument, too, is without merit. As we explained previously, the gambling
control statutes do not affect the legality of the settlement agreements that the parties signed
on November 25, 1992, including the contract for deed. Furthermore, as the District Court
found based on hearing testimony, even if the gambling control statutes did affect the legality
of the settlement agreements, the Gambling Control Division may consider real estate on
9
which a casino is located a separate business activity that is not subject to the Division's
approval, and, therefore, is severable from thc othcr settlement agreements. We conclude
that the District Court's finding that Kosmerl breached the contract for deed by rehsing to
proceed with closing and performance of the contract for deed is supported by substantial
evidence and is not clearly erroneous. Rule 52(a), M.R.Civ.P. Accordingly, we hold that the
District Court properly awarded Evelyn her portion of the real estate rent generated since
November 25, 1992.
730 4. Did the District Court err in assessing Defendants Henry and Kosmerl
with their share of attorney fees incurred to obtain gambling and liquor license
approval?
713 1 The District Court ordered Henry, Kosmerl and Evelyn to each pay one-third of the
attorney fees incurred in obtaining gambling and liquor licenses and to perform other legal
work on behalf of the casinos which totaled over $67,000. First, Henry and Kosmerl argue
that under the "unclean hands" doctrine that the District Court should not have awarded
Evelyn these attorney fees because her ownership interest is illegal. Second, Henry and
Kosmerl alternatively argue that even if these fees are recoverable, the District Court still
violated their right to due process guaranteed by Article 11, Section 17 of the Montana
Constitution when it failed to conduct a hearing concerning the reasonableness of these fees
before awarding them to Evelyn. We disagree.
132 First, as we discussed in Issue 1, the argument that Evelyn is not entitled to these
attorney fees because her ownership interest is illegal is without merit. Second, after
reviewing the record, we conclude that Henry's and Kosmerl's alternative argument that their
due process rights were violated is raised for the first time on appeal. Furthermore, we
decline to extend the "substantial rights" exception to the facts before us, and, therefore, we
will not address this argument. See Day v. Payne (1996), 280 Mont. 273,276-77,929 P.2d
864, 866. On January 30, 1996, the District Court in conjunction with its order of specific
performance of the settlement agreements also ordered Henry and Kosmerl to submit an
accounting of the revenue and expenses of each casino for the years 1992-1995.
Furthermore, the District Court set a hearing date for argument and testimony concerning the
propriety of the accounting and concerning thc amounts of any obligations to be set off,
"including attorney fees and other expenses incurred in obtaining gambling operator licenses
on behalf of the casinos." However, Henry and Kosmerl failed to comply with this order,
and, consequently, Evelyn subpoenaed the accountant for the casinos to provide the
accounting information.
733 This information, including the amount of attorney fees and costs incurred regarding
the gambling and liquor license applications was submitted to the District Court both in the
form of sworn affidavits and testimony given during the June 10, 1996 hearing concerning
the accounting. Henry and Kosmerl failed to object to the evidence concerning the amount
of these attorney fees and costs; failed to offer evidence to the contrary; and failed to conduct
cross examination concerning these fees and costs at the June 10, 1996 hearing. As such,
they cannot now raise their objections for the first time on appeal.
734 5. Did the District Court abuse its discretion by awarding Evelyn attorney
fees?
735 The District Court also awarded Evelyn $34,116.79 in attorney fees pursuant to $37-
6 1-421, MCA, which provides:
An attorney or party to any court proceeding who, in the determination of the
court, multiplies the proceedings in any case unreasonably and vexatiously
may be required by the court to satisfy personally the excess costs, expenses,
and attorney fees reasonably incurred because of such conduct.
In its July 18, 1996 Final Judgment, the District Court, relying upon this statute, stated in
Conclusion of Law No. 16 that:
Here, Henry and Kosmcrl havc intentionally multiplied this procecding by
failing to fulfill their settlement agreements, applying for gambling licenses
and then opposing the applications, and refusing to file the accounting ordered
in this case. The only explanation imaginable for Henry and Kosmerl's
conduct is that they seek to cause delay and expense. Such conduct is
unreasonable and vexatious.
136 On appeal, having expressly stipulated that the amount of these attorney fees was
reasonable, Henry and Kosmerl do not contest the amount of fees awarded. However, they
do argue that the District Court erred in applying 5 37-61-421, MCA, to award Evelyn
attorney fees because "[aln award of attorney's fees to enforce an illegal ownership interest
is never sustainable as a matter of law." Again, as we discussed in Issue 1, Henry and
Kosmerl are barred from raising any claims concerning the legality of Evelyn's ownership
interest in the casinos. Therefore, we will not address this issue. Consequently, we hold that
the District Court did not abuse its discretion when it awarded Evelyn $34,116.79 in attorney
fees pursuant to 3 37-6 1-421, MCA.
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737 6 . Did the District Court abuse its discretion by denying Defendant
Kosmerl's motion to amend the judgment?
7/38 As discussed previously, Kosmerl never complied with the District Court's January
31,1996 Order to submit an accounting for each casino for the period 1992-1995. However,
after the District Court entered judgment in Evelyn's favor, Kosmerl filed a motion to amend
the judgment pursuant to Rule 52(b), M.R.Civ.P., asserting that thc District Court should
order Evelyn to reimburse Kosmerl for her share of the real estate taxes and insurance costs
that he claimed he paid from 1992-1995. On September 18, 1996, the District Court denied
Kosmerl's Rule 52(b) motion.
739 On appeal, Kosmerl argues that the District Court erred in denying his motion to
amend the judgment. This argument is without merit. We have stated before that a Rule
52(b), M.R.Civ.P., motion must be based upon the record as it existed at the time the district
court made its findings and conclusions and cannot be based upon new evidence. See Ring
v. Hoselton (1982), 197 Mont. 414,422,643 P.2d 1165, 1170. Furthermore, it is within the
district court's discretion to grant or deny post-trial motions. Montana Rail Link v. Byard
(1993), 260 Mont. 331, 337, 860 P.2d 121, 125. Additionally,
[tlhe primary purpose of Rule 52(b) is to enable the appellate court to
obtain a correct understanding of the factual issues determined by the trial
court as a basis for the conclusions of law and judgment entered thereon. A
party who failed to prove his strongest case is not entitled to a second
opportunity by moving to amend a particular finding of fact or a conclusion of
law.
9A Charles A. Wright and Arthur R. Miller, Federal Practice and Procedure: Civil 2d § 2582
(1995).
1140 To support his motion, Kosmerl filed an affidavit regarding the costs of real estate
taxes and insurance for 1992-1995 when he filed his Rule 52(b) motion. However, Kosmerl
had access to his real estate tax and insurance information all throughout the litigation of this
matter and could have submitted the information prior to entry ofjudgment, but failed to do
so. Because, Kosmerl bases his Rule 52(b) motion on new evidence not submitted before
entry of judgment, we conclude that the District Court did not abuse its discretion when it
denied Kosmerl's motion to amend the judgment.
141 7. Did the District Court abuse its discretion by denying Defendants Henry's
and Kosmerl's Rule 60(b), M.R.Civ.P., motion?
142 On August 16, 1996, Henry and Kosmerl filed a Rule 6O(b), M.R.Civ.P., motion for
relief from final judgment, asserting that the District Court erred in retroactively applying the
settlement agreements by changing their effective date from July 1, 1995, to November 25,
1992, because Evelyn's attorney had represented to a Gambling Control Investigator on June
2, 1993, that the settlement agreements were not retroactive. On September 18, 1996, the
District Court denied Henry's and Kosmerl's Rule 6O(b) motion.
743 Here, like in Issue 2, Henry and Kosmerl again argue that the District Court erred in
"retroactively" applying the settlement agreements at issue. As discussed previously, this
argument is without merit. In both their brief to the District Court and now on appeal, Henry
and Kosmerl rely primarily on Rule 6O(b)(6), M.R.Civ.P., arguing that because Evelyn has
"unclean hands," she should be equitably barred from having the courts rather than the
Gambling Division decide whether the settlement agreements are retroactive. Henry and
Kosmerl contend that if Evclyn's attorney had told the District Court about his admission to
the Gambling Control Investigator that the settlement agreements were not retroactive, the
District Court never would have found that Henry and Kosmerl had breached the settlement
agreements prior to July 1, 1995, and never would have awarded Evelyn $123,134.96.
744 Just as with Henry's and Kosmerl's previous arguments, they again attempt to ignore
the effective dates of the settlement agreements to avoid liability for breach of those
agreements. However, their argument concerning the proper forum for determining the
"retroactivity" of these agreements is based on the underlying presumption that the statutes
and administrative rules governing gambling license applications also govern the legality of
the settlement agreements at issue. As we discussed previously in Issue 2, the statutes and
administrative rules controlling gambling license applications do not control the legality or
effective dates of contracts. Consequently, Henry's and Kosmerl's argument that the
Gambling Division, not the courts, should decide the "retroactivity" issue is without merit.
Accordingly, we hold that the District Court properly denied Henry's and Kosmerl's Rule
60(b) motion.
745 8. Should Defendants Henry and Kosmerl pay Kelman's attorney fees on
appeal?
7/46 Pursuant to Rule 32, M.R.App.P., this Court is requested to award Kelman attorney
fees on appeal. In Federated Mut. Ins. Co. v. Anderson (1996), 277 Mont. 134, 145, 920
P.2d 97, 104, we awarded the respondent reasonable costs and attorney fees incurred on
15
appeal based on the appellant's inconsistent and conflicting positions, its baseless appellate
claims, and its inaccurate citation in its appellate brief. Similarly herc, Hcnry's and
Kosmerl's position throughout litigation has been inconsistent with the underlying settlement
agreements. Both in the District Court and now on appeal, they have repeatedly presented
arguments of illegality concerning both Zollie's and Evelyn's ownership interest in the
casinos which they had waived pursuant to the settlement agreements. These actions have
resulted in their continued non-performance of the settlement agreements which they signed
and executed over five years ago.
747 We agree with the District Court that Henry and Kosmerl have multiplied these
proceedings unreasonably and vexatiously. Furthermore, we conclude that Henry and
Kosmerl brought this appeal without substantial or reasonable grounds. Accordingly,
pursuant to Rule 32, M.R.App.P., we hold that Henry and Kosmerl shall pay Kelman's
reasonable attorney fees incurred in defending this appeal.
748 For the foregoing reasons, the judgment of the District Court is affirmed.
Additionally, this case is remanded to the District Court for determination of the amount of
attorney fees to which Kelman is entitled pursuant to this Opinion.
749 Affirmed and remanded.
We Concur: