Qualsett v. Abrahams ( 2016 )

OPINION OF THE NEBRASKA COURT OF APPEALS
(Designated for Permanent Publication)
NOTICE: DUE TO UNFORESEEN CIRCUMSTANCES, THIS OPINION IS BEING POSTED
TEMPORARILY IN “SLIP” OPINION FORM. IT WILL BE REPLACED AT A LATER DATE
WITH AN “ADVANCE”OPINION, WHICH WILL INCLUDE A CITATION.
Case Title
RICHARD QUALSETT, INDIVIDUALLY AND AS ATTORNEY IN FACT FOR THE
FORMER SHAREHOLDERS OF OASIS PUBLISHING, INC., APPELLANT,
V.
DAVID ABRAHAMS, INDIVIDUALLY AND AS ATTORNEY IN FACT FOR THE
FORMER SHAREHOLDERS OF OASIS PUBLISHING, INC., APPELLEE.
Case Caption
QUALSETT V. ABRAHAMS
Filed April 19, 2016. No. A-15-215.
Appeal from the District Court for Lancaster County: STEPHANIE F. STACY,
Judge. Affirmed.
Robert R. Creager, of Anderson, Creager & Wittstruck, P.C., L.L.O., for
appellant.
Thomas E. Zimmerman and John C. Hahn, of Jeffrey, Hahn, Hemmerling &
Zimmerman, P.C., L.L.O., for appellee.
QUALSETT V. ABRAHAMS
Filed April 19, 2016. No. A-15-215.
1. Equity: Appeal and Error. A case in equity is reviewed de novo on the record, subject to the
rule that where credible evidence is in conflict on material issues of fact, an appellate court
considers and may give weight to the fact the trial court observed the witnesses and accepted one
version of the facts over another.
2. Limitations of Actions: Claims: Recoupment. Unlike a counterclaim that seeks an
affirmative judgment, the defense of recoupment is not barred by a statute of limitations.
3. Claims: Recoupment. Recoupment may be used where a defendant has a claim for damages
against a plaintiff arising out of the very same transaction from which the plaintiff seeks to
recover.
4. Claims: Recoupment: Proof. To state an affirmative defense of recoupment, the defendant
must prove the elements of his claim and that it occurred in the very same action as the plaintiff’s
claim against him.
5. Negligence: Proof. The breach of a fiduciary duty has been likened to professional
malpractice; therefore, to prove the elements of breach of fiduciary duty, the moving party must
establish the elements of negligence--duty, breach of duty, causation, and damages.
6. Actions: Negligence: Recoupment: Equity. An action for breach of fiduciary duty seeking
an equitable recoupment is an equitable action.
7. Equity: Appeal and Error. In an appeal of an equitable action, an appellate court tries factual
questions de novo on the record and reaches a conclusion independent of the findings of the trial
court, provided that where credible evidence is in conflict on a material issue of fact, the
appellate court considers and may give weight to the fact that the trial judge heard and observed
the witnesses and accepted one version of the facts rather than another.
8. Negligence: Damages. It is the duty of the party claiming a breach of fiduciary duty to also
establish that he was damaged by such breach.
9. Trusts: Agency: Equity. An agent or other fiduciary who deals with the subject matter of the
agency so as to make a profit for himself will be held to account in equity as trustee for all profits
and advantages acquired by him in such dealings.
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IRWIN, PIRTLE and RIEDMANN, Judges.
RIEDMANN, Judge.
INTRODUCTION
Richard Qualsett, in his capacity as attorney in fact for the former shareholders of Oasis
Publishing, Inc. (Oasis), filed a complaint against David Abrahams, a former Oasis shareholder,
alleging breach of fiduciary duty. Abrahams filed a counterclaim, seeking a declaration that he
was entitled to recovery of funds Qualsett was withholding from him. In response to the
counterclaim, Qualsett asserted the affirmative defense of recoupment, based upon Abrahams’
alleged breach of fiduciary duty. The district court for Lancaster County (1) granted summary
judgment to Abrahams on Qualsett’s complaint, on the basis that the statute of limitations barred
Qualsett’s claim against him, and (2) entered judgment for Abrahams on his counterclaim,
rejecting Qualsett’s claim for recoupment, following a bench trial. Qualsett appeals both orders.
After reviewing the record on appeal, we agree that Qualsett was not entitled to
recoupment on Abrahams’ counterclaim, because he failed to prove all of the elements of a
breach of fiduciary duty claim. Because Qualsett was unsuccessful on his breach of fiduciary
duty claim asserted as a defense to Abrahams’ counterclaim, we need not determine whether the
statute of limitations barred his affirmative claim of breach of fiduciary duty asserted in his
complaint. Therefore, we affirm the court’s order in favor of Abrahams.
BACKGROUND
Qualsett, Abrahams, and Craig Smith formed Oasis. Abrahams served as president and
managed the day-to-day activities of the company, while Qualsett provided the majority of the
company’s financial backing and Smith contributed financially and to marketing. Some smaller
shareholders also purchased Oasis stock. The business of Oasis involved creating digital,
searchable versions of statutes and case law. Through litigation, Oasis obtained a license from
West Publishing Company that allowed it to utilize that company’s case law pagination.
In April 2001, Oasis shareholders negotiated the sale of all of Oasis’ stock to JuriSearch
Holdings, LLC (JuriSearch). To effectuate the sale, the Oasis shareholders signed an irrevocable
power of attorney naming Qualsett, Abrahams, and Smith as attorneys in fact for Oasis. The
stock purchase agreement with JuriSearch involved a cash payment at closing of $1,110,000,
largely to retire Oasis’ debt, and a promissory note upon which JuriSearch was to make monthly
interest payments followed by balloon principal payments in June 2001 and April 2003. The
parties also agreed during negotiations that Abrahams would go to work for JuriSearch following
the sale to assist with the transition. Although Abrahams began working with JuriSearch
immediately after the stock sale, his employment agreement was not signed until later that year.
Abrahams ultimately signed two contracts at the same time: an employment agreement and a
noncompetition agreement (the noncompete agreement). Two versions of the employment
agreement appear in the record. One version of the employment agreement references the
noncompete agreement, which in turn references an employment agreement; the other version
makes no reference to the noncompete agreement. Abrahams’ employment agreements paid him
in membership units or in stock options. His noncompete agreement paid him separately $10,000
per month for 2 years.
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In April 2003, JuriSearch’s final balloon principal payment came due and the former
Oasis shareholders learned that JuriSearch would be unable to pay what it owed. Qualsett,
Abrahams, and Smith, operating under their power of attorney, approved a 1-year extension of
JuriSearch’s principal payment with continued interest payments. In March 2004, former Oasis
shareholders again rolled over JuriSearch’s principal payment. Annual rollovers of the principal
amount due to JuriSearch’s inability to pay continued in this manner until the April 2007
principal payments were coming due. Qualsett states that after the 2006 rollover agreement, he
learned that Abrahams had been receiving payments on a noncompete agreement as well as an
employment agreement from JuriSearch. Qualsett took over negotiations of the 2007 rollover
from Abrahams because he was upset that Abrahams was negotiating rollover of JuriSearch’s
debt to him personally at the same time as he was negotiating rollover of JuriSearch’s debt to the
former Oasis shareholders and that Abrahams had allegedly not disclosed his personal interests.
JuriSearch and Oasis eventually settled JuriSearch’s breach of its promissory note. The
settlement allowed JuriSearch to pay its debt in equal installments each month over a period of
42 months. In June 2008, Qualsett obtained permission from the former Oasis shareholders to
withhold Abrahams’ portion of the payments from JuriSearch’s installment payments on the
settlement and to further seek judgment against Abrahams for repayment of the moneys he
received under his noncompete agreement. Qualsett submitted at trial that he was presently
withholding $39,442 of distributions to Abrahams and that if JuriSearch continued to make all
payments, he would be holding $52,234 by the end of the year.
Qualsett, Abrahams, and Smith entered into a voluntary agreement tolling the statute of
limitations for certain potential causes of action against one another beginning on April 30, 2010.
Qualsett, in his capacity as attorney in fact for the former shareholders of Oasis, filed suit against
Abrahams for breach of fiduciary duty stemming from his allegedly undisclosed self-dealing in
October 2011. Abrahams counterclaimed for a declaratory judgment that he is entitled to his
portion of the payment from JuriSearch’s settlement and fifth installment promissory note. To
the counterclaim, Qualsett pled the affirmative defense of equitable recoupment.
The district court found on Abrahams’ motion for summary judgment that the statute of
limitations barred Qualsett’s action against Abrahams. After trial on the counterclaim and
affirmative defense, the trial court entered judgment in favor of Abrahams in the amount of
$52,234. This appeal follows.
ASSIGNMENTS OF ERROR
Qualsett assigns, restated and renumbered, that the district court erred (1) in denying
Qualsett’s request for equitable recoupment and entering judgment in favor of Abrahams after
trial on Abrahams’ counterclaim and (2) in concluding that Qualsett’s claim was barred by the
statute of limitations on summary judgment.
STANDARD OF REVIEW
[1] A case in equity is reviewed de novo on the record, subject to the rule that where
credible evidence is in conflict on material issues of fact, we consider and may give weight to the
fact the trial court observed the witnesses and accepted one version of the facts over another.
Smith v. City of Papillion, 270 Neb. 607, 705 N.W.2d 584 (2005).
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An appellate court will affirm a lower court’s grant of summary judgment if the pleadings
and admitted evidence show that there is no genuine issue as to any material facts or as to the
ultimate inferences that may be drawn from those facts and that the moving party is entitled to
judgment as a matter of law. Zornes v. Zornes, 292 Neb. 271, 872 N.W.2d 571 (2015).
ANALYSIS
Trial on Counterclaim and Defense
of Equitable Recoupment.
Although the trial court granted summary judgment to Abrahams on Qualsett’s breach of
fiduciary claim, determining that it was barred by the statute of limitations prior to the case’s
proceeding to a bench trial on Abrahams’ counterclaim, we address the issues in reverse order.
We do so because the analysis of the merits of Qualsett’s affirmative defense is dispositive of the
appeal.
In his counterclaim, Abrahams initially pled three causes of action: breach of fiduciary
duty, declaratory judgment relating to future distributions from JuriSearch, and defamation. At
trial, however, Abrahams elected to proceed on only the declaratory judgment claim.
In response to the counterclaim, Qualsett pled the defense of recoupment, claiming that if
he were found to be indebted to Abrahams, then Qualsett was entitled to a setoff for the amounts
Abrahams received from JuriSearch under the noncompete agreement. The basis for this claim
was that Abrahams breached his fiduciary duty to the Oasis shareholders by negotiating and
executing an employment agreement and a noncompete agreement without disclosing the
agreements to the Oasis shareholders and by negotiating JuriSearch’s default on his noncompete
agreement at the same time as he was negotiating JuriSearch’s default on its promissory note to
former Oasis shareholders. Qualsett’s allegations supporting his defense of recoupment mirrored
those pled in the original complaint in support of his claim for breach of fiduciary duty.
The district court found in favor of Abrahams on his counterclaim for declaratory
judgment, declaring Abrahams to be entitled to payment of his contractual share of the
JuriSearch distribution. It found against Qualsett on his affirmative defense of recoupment,
concluding that although he proved that Abrahams owed a fiduciary duty to the Oasis
shareholders, he failed to prove a breach of that duty, prove that any alleged breach damaged the
former shareholders, or prove that the alleged breach arose out of the same transaction as
Abrahams’ claim for declaratory relief.
On appeal, Qualsett assigns that the district court erred in rejecting his affirmative
defense of recoupment and that the district court therefore further erred in entering judgment for
Abrahams after trial. Qualsett does not dispute that Abrahams would be entitled to judgment on
his counterclaim if the court rejected Qualsett’s affirmative defense of recoupment.
[2-4] Unlike a counterclaim that seeks an affirmative judgment, the defense of
recoupment is not barred by a statute of limitations. Ed Miller & Sons, Inc. v. Earl, 243 Neb.
708, 502 N.W.2d 444 (1993). Recoupment may be used where a defendant has a claim for
damages against a plaintiff arising out of the very same transaction from which the plaintiff
seeks to recover. See id. To state an affirmative defense of recoupment, the defendant must prove
the elements of his claim and that it occurred in the very same action as the plaintiff’s claim
against him. See id.
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In this case, Qualsett’s defense of recoupment is based upon his claim that Abrahams
breached his fiduciary duty to the former Oasis shareholders and caused them damages of
approximately $199,000. To succeed, then, Qualsett must prove the elements of breach of
fiduciary duty and that this breach occurred in the very same transaction as that giving rise to
Abrahams’ counterclaim. See id.
[5] The breach of a fiduciary duty has been likened to professional malpractice.
Community First State Bank v. Olsen, 255 Neb. 617, 587 N.W.2d 364 (1998); In re Louise V.
Steinhoefel Trust, 22 Neb. Ct. App. 293, 854 N.W.2d 792 (2014). Malpractice is itself an instance of
negligence; therefore, to prove the elements of breach of fiduciary duty, the moving party must
establish the elements of negligence--duty, breach of duty, causation, and damages. See In re
Louise V. Steinhoefel Trust, supra.
The district court determined that although Qualsett proved the existence of a fiduciary
duty, he failed to prove the remaining elements. To reach this conclusion, the district court made
several findings of fact based upon the evidence presented to it. It determined that as early as
2003, when JuriSearch first defaulted on the promissory note, Abrahams told both Qualsett and
Smith that JuriSearch was not paying him the money he was owed either. At that time, Abrahams
was no longer working for JuriSearch, but neither Qualsett nor Smith inquired why JuriSearch
owed Abrahams any money. The court further found that neither Qualsett nor Abrahams was a
credible witness and that their testimony was not entitled to much weight. The court determined
that Smith, the only other witness to testify at trial, was credible.
[6,7] An action for breach of fiduciary duty seeking an equitable recoupment is an
equitable action. In an appeal of an equitable action, an appellate court tries factual questions de
novo on the record and reaches a conclusion independent of the findings of the trial court,
provided that where credible evidence is in conflict on a material issue of fact, the appellate court
considers and may give weight to the fact that the trial judge heard and observed the witnesses
and accepted one version of the facts rather than another. Trieweiler v. Sears, 268 Neb. 952, 689
N.W.2d 807 (2004).
While the proponent of an equity claim generally must prove the elements of his claim by
clear and convincing evidence, we have previously noted that Nebraska law is unclear as to the
burden of proof for an equitable defense brought in response to a claim at law. See Precision
Enterprises v. Duffack Enterprises, 14 Neb. Ct. App. 512, 710 N.W.2d 348 (2006), overruled in part
on other grounds, Knights of Columbus Council 3152 v. KFS BD, Inc., 280 Neb. 904, 791
N.W.2d 317 (2010). Without determining which burden of proof applies in this situation, we find
that even under the preponderance of the evidence standard applied by the district court, Qualsett
has not satisfied the burden of proving he is entitled to equitable recoupment.
There is no disagreement that Abrahams owed a fiduciary duty to the former Oasis
shareholders. The issues are whether he breached that duty and, if so, whether that breach caused
damage to the former shareholders. Upon our de novo review, we conclude that the evidence is
insufficient to support causation.
Qualsett first argues that Abrahams should have disclosed the employment agreement,
and particularly the noncompete agreement, when he was initially negotiating the sale of Oasis to
JuriSearch. The evidence reveals, however, that neither the employment agreement nor the
noncompete agreement existed at the time of those negotiations. According to the evidence,
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JuriSearch did not provide any contracts to Abrahams until a couple of months after the sale.
Abrahams cannot be held liable for failing to disclose that which did not exist.
Qualsett also argues that Abrahams should have disclosed the existence of the agreements
when he was negotiating the first rollover of the promissory note in 2003, because he was also
negotiating payment on his noncompete agreement. The record discloses that Abrahams received
his requisite $10,000 per month through December 2001 under the noncompete agreement. On
April 15, 2002, he entered into his first amendment to the noncompete agreement, in which he
agreed that payment for the first 4 months of 2002 would be delayed and his monthly payments
would be reduced to $2,000, with a lump sum of $135,833.50 to be paid on March 1, 2003, and
interest at 10 percent on any payment delinquent by 10 or more days. When Abrahams
negotiated this amendment, JuriSearch was still making monthly interest payments to the former
Oasis shareholders and had not yet defaulted on the promissory note; therefore, Abrahams had
no duty to disclose.
However, Abrahams continued to negotiate amendments of his noncompete agreement
annually through 2006. Beginning in 2003, he also began negotiating the rollovers of the
promissory note in favor of the former Oasis shareholders. This was allegedly a breach of
Abrahams’ fiduciary duty. Once a fiduciary relationship was established and evidence was
presented that certain transactions existed that allegedly breached a fiduciary duty, the burden
shifted to Abrahams to prove the fairness of the transactions. See Woodward v. Andersen, 261
Neb. 980, 627 N.W.2d 742 (2001). Abrahams failed to produce such evidence. The record
contains no evidence of the substance of the negotiations or what efforts Abrahams put forth to
secure a favorable result for the shareholders vis-a-vis the result he obtained on his personal
negotiations. Accordingly, we determine that Abrahams breached his fiduciary duty to disclose
at the time he was performing dual negotiations.
[8] Not every breach of a fiduciary duty results in liability for the fiduciary, however. See
In re Louise V. Steinhoefel Trust, 22 Neb. Ct. App. 293, 854 N.W.2d 792 (2014) (concluding breach
of fiduciary duty existed, but no damages resulted). It is the duty of the party claiming a breach
of fiduciary duty to also establish that he was damaged by such breach. See id. The measure of
damages is “the loss which the [principal] suffered as a consequence of the [agent’s] breach of
fiduciary duties.” Mischke v. Mischke, 253 Neb. 439, 448, 571 N.W.2d 248, 256 (1997).
Upon our de novo review, we find the record wholly lacking in evidence to support a
finding that the negotiation of the promissory note would have resulted in a more favorable
outcome for the shareholders had Abrahams disclosed his agreements. Both Qualsett and Smith
testified that Abrahams served as the lead negotiator because of his prior employment with
JuriSearch and resultant knowledge of its internal workings. According to the testimony, before
the attorneys in fact agreed to each amendment, Qualsett, Abrahams, and Smith met with Oasis’
attorney to discuss their options. Each time the parties determined it was better to roll over the
note than take back the Oasis stock. They each agreed their options were limited.
In his testimony, Qualsett implies that he was able to obtain more favorable terms when
he negotiated the note in 2007. He points out that he was able to obtain a $100,000 principal
payment, whereas Abrahams was able only to increase the interest rate. But without information
on JuriSearch’s financial situation at the time Qualsett negotiated in 2007 as compared to the
time periods during which Abrahams negotiated, we are unable to conclude this was a result of a
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lack of effort on the part of Abrahams. The record discloses that as of late 2001, JuriSearch was
considering bankruptcy and had an immediate need for cash. However, we do not know how its
financial situation progressed. We can glean from the amendments to Abrahams’ noncompete
agreement that he was never able to improve the terms of his own agreement; the amendments
extended the dates of payments, lowered the amount of the monthly payments, and set the
interest rate for delinquent payments at 10 percent, which was lower than the rate included in the
original agreement.
We further note that JuriSearch defaulted on Abrahams’ noncompete agreement prior to
any default on the promissory note. Moreover, it appears that JuriSearch consistently made the
monthly interest payments to the former shareholders, even when it had stopped payment on the
noncompete agreement. Therefore, there is no evidence that the former Oasis shareholders
suffered loss because Abrahams negotiated the rollover of their promissory note without
disclosing that he was also negotiating JuriSearch’s default on the noncompete agreement. See
Mischke v. Mischke, 253 Neb. 439, 571 N.W.2d 248 (1997).
[9] Qualsett argues that the correct measure of damages is any funds Abrahams obtained
from the noncompete agreement. We disagree. Although “‘“[a]n agent or other fiduciary who
deals with the subject-matter of the agency so as to make a profit for himself will be held to
account in equity as trustee for all profits and advantages acquired by him in such dealings,”’”
id. at 447, 571 N.W.2d at 255-56, this point of law comes from cases in which fiduciaries profit
beyond the value of their wrongfully obtained agent property and in which the agent is therefore
entitled to the profits. For example, in ProData Computer Servs. v. Ponec, 256 Neb. 228, 590
N.W.2d 176 (1999), a company’s financial officer converted over $87,000 of company funds and
deposited them into personal investment accounts. The Nebraska Supreme Court approved a
constructive trust over the investment accounts because the officer owed personal profits from
his breach of fiduciary duty to the principal. Id. Similarly, in Mischke v. Mischke, supra, the
Nebraska Supreme Court held that a personal representative of an estate who acquired estate
assets at a discount and then sold them at a profit would be liable to the estate for all profits
realized from the sale, even those profits beyond the appraised value of the items improperly
acquired.
This case is distinguishable because there is no evidence that Abrahams made a profit for
himself in negotiating a rollover of his noncompete agreement at the same time as he negotiated
the Oasis promissory note rollovers. See ProData Computer Servs. v. Ponec, supra. As discussed
above, Qualsett did not satisfy his burden to show that Abrahams breached his fiduciary duty by
not disclosing his noncompete agreement at the time he entered into it. Rather, we determine that
the potential breach of fiduciary duty occurred at the time of the undisclosed simultaneous
rollover negotiations. Therefore, the question on the issue of damages is not whether Abrahams
profited from the noncompete agreement, but whether he profited from the renegotiations of his
noncompete agreement between 2003 and 2006 when he was also negotiating on behalf of the
former Oasis shareholders. Given that Abrahams negotiated a reduction of the interest rates he
was owed on the noncompete agreement and an extension of the time period to pay him, there is
no evidence that he profited at all during these renegotiations, much less at the former
shareholders’ expense. This is distinguishable from the constructive trust cases discussed above,
where the agent gained profit beyond the value of the improperly converted property such that a
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constructive trust over the profit was necessary to prevent unjust enrichment of the agent. See
ProData Computer Servs. v. Ponec, supra. Because there is no evidence of unjust enrichment or
evidence that the Oasis shareholders suffered a loss because of Abrahams’ negotiations, we find
this case distinguishable and Qualsett’s theory of damages inapplicable.
We therefore agree with the district court that Qualsett failed to prove that any breach of
fiduciary duty by Abrahams resulted in damages to the former Oasis shareholders. As a result,
Qualsett’s affirmative defense of recoupment must fail.
Statute of Limitations--Motion for Summary Judgment.
Qualsett additionally assigns that the district court erred in finding in its order granting
Abrahams’ motion for summary judgment that the statute of limitations barred his claim against
Abrahams. Specifically, Qualsett argues that a genuine issue of material fact exists as to when he
discovered Abrahams’ alleged fraud for purposes of the discovery rule.
However, Qualsett’s complaint and affirmative defense were both based upon a claim of
breach of fiduciary duty. The allegations supporting his defense of recoupment mirrored those
pled in the original complaint in support of his claim for breach of fiduciary duty. Because we
have determined he failed to prove causation on his breach of fiduciary duty claim following a
trial involving that issue, it is not necessary to address whether the trial court erred in finding the
claim was barred by the statute of limitations. See Hara v. Reichert, 287 Neb. 577, 581, 843
N.W.2d 812, 816 (2014) (“[i]ssue preclusion bars the relitigation of a finally determined issue
that a party had a prior opportunity to fully and fairly litigate”). Therefore, we do not reach
analysis on the statute of limitations issue and we affirm the judgment of the district court.
CONCLUSION
Because we find, following a de novo review of the record, that Qualsett failed to prove
the former Oasis shareholders were damaged as a result of Abrahams’ alleged fraud, we affirm
the trial court’s order granting Abrahams’ counterclaim. Since a judgment in favor of Abrahams
on the merits of an alleged breach of fiduciary duty is supported by the record, we need not reach
the issue of summary judgment.
AFFIRMED.
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