Gas Sensing Technology Corporation, a Wyoming Corporation D/B/A Welldog v. New Horizon Ventures Pty Ltd, as Trustee of the Linklater Family Trust and Ewan Meldrum, as Trustee of the Meldrum Family Trust ( 2020 )

IN THE SUPREME COURT, STATE OF WYOMING
2020 WY 114APRIL TERM, A.D. 2020
August 27, 2020
GAS SENSING TECHNOLOGY
CORPORATION, a Wyoming
Corporation d/b/a WELLDOG,
Appellant
(Defendant),
v.
S-19-0277
NEW HORIZON VENTURES PTY
LTD, as Trustee of the Linklater Family
Trust and EWAN MELDRUM, as
Trustee of the Meldrum Family Trust,
Appellees
(Plaintiffs).
Appeal from the District Court of Albany County
The Honorable Tori R.A. Kricken, Judge
Representing Appellant:
Phillip A. Nicholas, Meggan J. Nicholas, Nicholas & Tangeman, LLC, Laramie,
Wyoming. Argument by Mr. Nicholas.
Representing Appellee New Horizon Ventures PTY LTD, as Trustee of the Linklater
Family Trust:
Pro se.
Representing Appellee Ewan Meldrum, as Trustee of the Meldrum Family Trust:
Timothy M. Stubson, Crowley Fleck PLLP, Casper, Wyoming.
Before DAVIS, C.J., and FOX, KAUTZ, GRAY, JJ, and OVERFIELD, D.J..
NOTICE: This opinion is subject to formal revision before publication in Pacific Reporter Third.
Readers are requested to notify the Clerk of the Supreme Court, Supreme Court Building, Cheyenne,
Wyoming 82002, of typographical or other formal errors so correction may be made before final
publication in the permanent volume.
KAUTZ, Justice.
[¶1] New Horizon Ventures Pty Ltd, as Trustee of the Linklater Family Trust (Linklater
Trust), and Ewan Meldrum, as Trustee of the Meldrum Family Trust (Meldrum Trust)
(collectively “the Trusts”), sued Gas Sensing Technology Corporation d/b/a WellDog
(GSTC) for payment of loans they made to GSTC to finance its oil and gas service
operations in Australia. GSTC asserted numerous affirmative defenses and counterclaims.
The district court dismissed GSTC’s counterclaims because it believed they unduly
complicated the action. After a trial, the jury ruled Linklater Trust had breached the
implied covenant of good faith and fair dealing; therefore, GSTC was not required to pay
its debt. The jury also found Meldrum Trust had breached the implied covenant but, instead
of excusing GSTC’s debt, it reduced the damages GSTC owed to Meldrum Trust.
[¶2] We reverse and remand because the district court erred by dismissing GSTC’s
counterclaims. We also provide guidance regarding the jury instructions.
ISSUES
[¶3] The issues on appeal are:
1. Did the district court err by dismissing GSTC’s counterclaims?1
2. Did the district court correctly instruct the jury?
FACTS
[¶4] This case presents a complex factual scenario involving many individuals and
entities. To decide the issues in this appeal, we need only generally describe the facts and
GSTC’s allegations.
1
GSTC also asserts in its statement of the issues that the district court erred by dismissing its third-party
complaint against Graeme Linklater and Ewan Meldrum in their individual capacities. The third-party
complaint stated causes of action for negligent misrepresentation and intentional/fraudulent
misrepresentation, which appear to be directed primarily at Mr. Linklater. On appeal, GSTC does not
provide any analysis of how the rules of procedure apply to its third-party complaint or why the third-party
claims should not be dismissed. For example, GSTC fails to address whether Mr. Linklater and Mr.
Meldrum are “opposing” parties or “coparties” in accordance with Wyoming Rule of Civil Procedure 13
and fails to even mention Wyoming Rule of Civil Procedure 14 which pertains specifically to third-party
practice. Given the lack of cogent argument on this matter, we will not further address it. See, e.g., Gowdy
v. Cook, 2020 WY 3, ¶ 31, 455 P.3d 1201, 1209 (Wyo. 2020) (refusing to address contentions not supported
by cogent argument or citation to pertinent authority) (citing Wright v. State, 2019 WY 49, ¶¶ 8-9, 440 P.3d
1092, 1094 (Wyo. 2019); Hodson v. Sturgeon, 2017 WY 150, ¶¶ 6-8, 406 P.3d 1264, 1265-66 (Wyo.
2017)).
1
[¶5] John Pope founded GSTC in 2007 through an entity known as Blue Sky Group, Inc.
GSTC is an oil and gas technical service company based in Laramie, Wyoming. It
developed patented chemical sensing systems to provide commercial reservoir analysis
services for coal, gas, alternative and conventional resources. GSTC provided equipment
and services related to this technology to customers who used it to measure methane and
carbon dioxide underground to locate coal bed methane wells. Initially, GSTC operated in
the United States and Canada, particularly the Powder River Basin in Wyoming. Around
2010, GSTC decided to enter the Australian market and formed an Australian subsidiary
called WellDog Proprietary Limited (WellDog).
[¶6] GSTC and WellDog secured venture equity and debt financing from investors in the
United States and Australia. One United States investor was Shell Technology Ventures,
a venture capital arm of Shell Oil and Gas Company. There were two primary groups of
investors from Australia. The first group was associated with Simon Ashton and included
companies known as ProX Proprietary Limited and Kinabalu Australia Proprietary
Limited. Kinabalu purchased shares in GSTC, and ProX loaned WellDog $4 million. The
other group of Australian investors was associated with John Mactaggart and included
companies known as Jontra Holdings Proprietary Limited, Associated Construction
Equipment Proprietary Limited, and Brisbane Angels Group Limited. Mr. Mactaggart’s
companies bought stock in, and loaned money to, GSTC and/or WellDog.
[¶7] Mr. Mactaggart introduced Graeme Linklater to Mr. Pope, and in 2012, Mr.
Linklater was hired as the chief financial officer for WellDog and GSTC. Mr. Linklater
was also the corporate secretary for both entities and a director of WellDog. In 2012 and
2013, Mr. Linklater did not take his full compensation. As a result, GSTC gave Linklater
Trust a $137,678.35 finance note. Linklater Trust is a “personal investment vehicle” Mr.
Linklater uses to pass assets to his family, and he is the director of the trustee, New Horizon
Ventures Proprietary Limited. The note included a twelve percent (12%) interest rate,
which increased to seventeen percent (17%) when the note was in default. Under the terms
of the Linklater Trust note, GSTC was supposed to make installment payments of all
accrued but unpaid interest and $5,000 in principal on the first day of each month. The
final maturity date was August 22, 2017.
[¶8] Mr. Ashton introduced Mr. Meldrum to Mr. Pope in 2011. In 2015, WellDog hired
Mr. Meldrum as its Asia Pacific regional manager. Before Mr. Meldrum went to work for
WellDog, Meldrum Trust purchased 30,000 shares in GSTC for $45,000.
[¶9] In 2013, Mr. Meldrum recognized he had a conflict of interest because his then-
employer, Baker Hughes, was negotiating an agreement with WellDog. Mr. Meldrum and
GSTC agreed to enter into a conversion agreement wherein Meldrum Trust’s equity in the
company would be converted into debt. Specifically, Meldrum Trust would exchange its
shares in GSTC for a promissory note. Mr. Meldrum testified Meldrum Trust is an “income
tax benefit trust” for his family and he is the trustee.
2
[¶10] The conversion agreement between GSTC and Meldrum Trust was not finalized
until 2016, but it was dated effective July 31, 2013. It provided for a twelve percent (12%)
interest rate and at the time the conversion agreement was signed in 2016, there was
$20,678.73 in accrued interest for a total balance of $65,678.73. A loan amortization
schedule attached to the conversion agreement showed GSTC was supposed to start
making payments to Meldrum Trust in October 2016, with the final payment due July 1,
2017.
[¶11] According to Mr. Pope, WellDog generated approximately $22 million in revenue
in 2016 making the company, by some accounts, worth $80 to $100 million. However,
GSTC and WellDog were experiencing cash flow problems and needed to raise funds to
pay their debts.
[¶12] GSTC claimed email communications between Mr. Mactaggart, Mr. Ashton, Mr.
Linklater, Mr. Meldrum and others showed a civil conspiracy to force GSTC and WellDog
into financial crisis, leading to a “restructure” of the companies with the Australian
investors gaining ownership of WellDog. GSTC claimed the co-conspirators interfered
with its attempts to raise funds to solve its cash flow problems.
[¶13] One of the alleged steps in the Australian investors’ plan involved derailing Shell
Technology Ventures’ investment in the company. By 2015, Shell had already invested
$2 million in GSTC and was negotiating to purchase an additional $5 million in stock from
the company. In the fall of 2015, Mr. Ashton, through Kinabalu, sold the same number of
shares to Shell for $1.8 million, causing GSTC to lose the large investment from Shell.
GSTC claimed Mr. Ashton improperly used information he gained as a director of GSTC
to divert Shell’s investment in the company, worsening the company’s cash position.
[¶14] The next step in the alleged conspiracy to take over WellDog was to force GSTC
and WellDog to default on its debts. One of WellDog’s notes to ProX came due in July
2016. In order to secure an extension of the loan to October 31, 2016, WellDog gave ProX
a general security interest over its assets. Mr. Linklater signed the general security
agreement as a director of WellDog.
[¶15] GSTC and WellDog defaulted on debts owed to ProX, Linklater Trust, Meldrum
Trust and the Mactaggart companies. Because it held the general security interest, ProX
was able, under Australian law, to appoint a receiver for WellDog. Mr. Linklater and Mr.
Meldrum worked for the receiver.
[¶16] WellDog’s assets were eventually sold to eQnomics which operates as Qteq, another
company controlled by Mr. Ashton. Mr. Meldrum became the chief executive officer of
Qteq, and Mr. Linklater was gifted shares in the company.
3
[¶17] GSTC filed actions in Australia and the United States, alleging Mr. Ashton, Mr.
Mactaggart, Mr. Meldrum, Mr. Linklater and others conspired to improperly take over
WellDog and misappropriate GSTC’s intellectual property and trade secrets. See, e.g., Gas
Sensing Technology Corp. v. Ashton, 795 Fed.Appx. 1010 (10th Cir. 2020); Gas Sensing
Technology Corp. v. Ashton, No. 16-CV-272-F, 2017 WL 2955353 (D. Wyo., June 12,
2017). For various reasons, those suits were dismissed. Id.Suit on the Notes
[¶18] On March 16, 2018, the Trusts filed suit in the district court against GSTC to recover
on their loans.2 GSTC responded with an answer, affirmative defenses, and counterclaims.
GSTC’s affirmative defenses included “[The Trusts] intentionally interfered and/or
conspired with others to impair [GSTC’s] performance under the loan agreements causing
damages which should be offset against any amounts unpaid and owing by [GSTC] to [the
Trusts].” GSTC’s counterclaims generally related to the Australian investors’ alleged
conspiracy to take over WellDog. The counterclaims included: 1) aiding and abetting the
wrongful actions of others; 2) insider transaction and conversion of corporate opportunity;
3) tortious interference with contract expectancy; 4) tortious interference with contract; 5)
self-dealing and unjust enrichment; 6) civil conspiracies; 7) lender liability and breach of
the covenant of good faith and fair dealing based in contract; 8) lender liability and breach
of the covenant of good faith and fair dealing based in tort; 9) misappropriation of trade
secrets, unfair business practices, and unfair competition; and 10) set off of damages
against equity and debt.
[¶19] The Trusts moved to dismiss GSTC’s counterclaims. They asserted GSTC’s
counterclaims were permissive and the district court had discretion to refuse to hear them.
They argued their complaint stated simple breach of contract claims and GSTC’s
counterclaims would unnecessarily complicate the case. GSTC responded to the motion
to dismiss by asserting its counterclaims were related to the notes and did not unnecessarily
complicate the litigation.
[¶20] The district court granted the Trusts’ motion to dismiss the counterclaims. It found
the counterclaims were permissive under Wyoming Rule of Civil Procedure (W.R.C.P.) 13
because they did not “arise out of the transaction or occurrence that is the subject matter of
[the Trusts’] claims.” It then ruled GSTC’s counterclaims would unduly complicate the
litigation by allowing a “simple note” case to grow “exponentially in terms of complexity
and of necessary discovery” regarding GSTC’s claims of an “extensive, ongoing
conspiracy far beyond the . . . notes at issue herein or a defense thereof.” Nevertheless, it
allowed GSTC to continue to assert its affirmative defenses.
2
Three other noteholders initially joined in the suit. For reasons not explained in the record, they were
dismissed prior to trial.
4
[¶21] The case proceeded to a seven-day jury trial, with Linklater Trust claiming GSTC
owed it approximately $177,000 in outstanding principal and interest on the finance note
and Meldrum Trust claiming GSTC owed it approximately $76,000 in outstanding
principal and interest on the conversion agreement. GSTC argued it should be excused
from liability because the Trusts had breached the implied covenant of good faith and fair
dealing by conspiring to prevent it from paying its debts so the co-conspirators could take
over WellDog.3 GSTC claimed it had lost a company worth $80-100 million as a result of
the co-conspirators’ actions.
[¶22] The district court granted the Trusts’ motion for judgment as a matter of law under
W.R.C.P. 50, finding the Linklater note and Meldrum conversion agreement were valid
contracts and, “in the absence of a defense by GSTC, [the Trusts] were entitled to enforce”
them. It denied the Trusts’ motion for judgment as a matter of law regarding GSTC’s
affirmative defense of breach of the implied covenant of good faith and fair dealing.
[¶23] The jury returned a verdict finding Linklater Trust had first breached the implied
covenant of good faith and fair dealing in the note and GSTC was excused from paying it.
It also found that Meldrum Trust had first breached the implied covenant in the conversion
agreement, and GSTC was entitled to reduce the damages it owed Meldrum Trust by
$43,566.49. The district court entered judgment against GSTC in favor of Meldrum Trust
for $46,737.86.
[¶24] Linklater Trust and GSTC filed post-trial motions for judgment as a matter of law,
which the district court denied. Linklater Trust and GSTC filed notices of appeal.
Linklater Trust’s appeal was later dismissed for want of prosecution. In addition, Linklater
Trust did not file an appellate brief to defend the district court’s rulings in this matter.
DISCUSSION
1. Dismissal of GSTC’s Counterclaims
[¶25] The district court dismissed GSTC’s counterclaims because they would unduly
complicate the case. It concluded it had discretion to do so under W.R.C.P. 13. To decide
whether the district court’s decision was in error, we must determine the scope of Rule 13.
3
The district court instructed the jury that Mr. Linklater was the director of New Horizon Ventures Pty
Ltd., which is the trustee of Linklater Trust, and Mr. Meldrum is the trustee of Meldrum Trust. The court
further informed the jury that corporations or trusts are separate entities from the individuals comprising
them, but they can only act through individuals. “Before a corporation’s or trust’s acts will be considered
those of a specific individual, or, similarly, before an individual’s acts will be considered those of a
corporation or trust, there must be a unity of interest and ownership that the individuality or separateness
of the corporation and/or trust and the individual(s) has ceased. If you find such unity of interest and
ownership exists, then the acts of the individual(s) may be attributable to the corporation or trust.” Neither
party challenges the instruction.
5
Interpretation of court rules is a question of law we review de novo. Matter of Estate of
Meeker, 2017 WY 75, ¶ 8, 397 P.3d 183, 185 (Wyo. 2017); Busch v. Horton Automatics,
Inc., 2008 WY 140, ¶ 13, 196 P.3d 787, 790 (Wyo. 2008); Bixler v. Oro Mgmt., LLC, 2006
WY 140, ¶ 5, 145 P.3d 1260, 1262 (Wyo. 2006).
[¶26] In interpreting rules of procedure, we apply the same standards used in statutory
construction. Busch, ¶ 13, 196 P.3d at 790 (citing Cotton v. McCulloh, 2005 WY 159, ¶
14, 125 P.3d 252, 257 (Wyo. 2005)). See also, Estate of Meeker, ¶ 8, 397 P.3d at 186.
Initially, we determine if the rule is clear or ambiguous. Estate of Meeker, ¶ 8, 397 P.3d at
186. If it is clear, we apply the plain language of the rule. Id. “‘We begin by making an
inquiry respecting the ordinary and obvious meaning of the words employed, according to
their arrangement and connection. We construe the [rule] as a whole, giving effect to every
word, clause, and sentence, and we construe together all parts of the [rule] in pari
materia.’” Id. (quoting Busch, ¶ 13, 196 P.3d at 790).
[¶27] Rule 13 states in relevant part:
(a) Compulsory Counterclaim. –
(1) In General. – A pleading must state as a
counterclaim any claim that – at the time of its service – the
pleader has against an opposing party if the claim:
(A) arises out of the transaction or occurrence
that is the subject matter of the opposing party’s claim; and
(B) does not require adding another party over
whom the court cannot acquire jurisdiction.
...
(b) Permissive Counterclaim. – A pleading may state as a
counterclaim against an opposing party any claim that is not
compulsory.
(c) Relief Sought in a Counterclaim. – A counterclaim need
not diminish or defeat the recovery sought by the opposing
party. It may request relief that exceeds in amount or differs in
kind from the relief sought by the opposing party.
...
(i) Separate Trials; Separate Judgments. – If the court orders
separate trials under Rule 42(b), it may enter judgment on a
6
counterclaim or crossclaim under Rule 54(b) when it has
jurisdiction to do so, even if the opposing party’s claims have
been dismissed or otherwise resolved.
[¶28] Compulsory counterclaims – those which arise out of the transaction or occurrence
that is the subject matter of the opposing party’s claim and do not require adding another
party over whom the court cannot acquire jurisdiction – must be pleaded in an action. Rule
13(a). Failure to plead a compulsory counterclaim will result in the claim being barred in
future proceedings. Lane Co. v. Busch Dev. Inc., 662 P.2d 419, 423-24 (Wyo. 1983)
(“Ordinarily, a claim which is a compulsory counterclaim under F.R.C.P. 13(a) or
W.R.C.P. 13(a), but is not brought, is thereafter barred.”); 20 Am. Jur. 2d., Counterclaim,
Recoupment & Setoff, § 107 (2020) (“A compulsory counterclaim that is not stated prior to
the conclusion of the action by judgment is generally barred in a subsequent or independent
action. The failure to file the counterclaim is res judicata of the relief that might have been
obtained by the counterclaim.”) (footnotes omitted).
[¶29] Under the plain language of Rule 13, any claim that is not compulsory is permissive.
Rule 13(a) & (b). In other words, a permissive counterclaim is “one that does not arise out
of the same transaction or occurrence furnishing the subject matter of the plaintiff’s claim.”
United States for the Use and Benefit of Kashulines v. Thermo Contracting Corp., 437 F.
Supp. 195, 198-99 (D. N.J. 1976). Rule 13(b) states a pleading may state a counterclaim
that is not compulsory. The word “may” as used in this context expresses permission to
file a counterclaim. https://www.merriam-webster.com/dictionary/may (“may” is defined
as “have permission to”). “In contrast to a compulsory counterclaim, a permissive
counterclaim may, but need not, be stated. The claimant has the option of whether or not
to plead a permissive counterclaim, and the failure to do so does not render the judgment
in the case res judicata, or preclude asserting the permissive counterclaim in a subsequent
action.” 20 Am. Jur. 2d, Counterclaim, Recoupment & Setoff, § 108 (2020).
[¶30] The primary goal of Rule 13(b) “is to permit the resolution of all controversies
between the parties in a single suit.” Banco Nacional de Cuba v. Chase Manhattan
Bank, 658 F.2d 875, 885 (2d Cir. 1981). See also, Olin Corp. v. Ins. Co. of N. Am., 807 F.
Supp. 1143, 1151 (S.D. N.Y. 1992) (quoting Banco, 658 F.2d at 885). “Both the words
‘compulsory’ in paragraph (a) and ‘permissive’ in paragraph (b) are descriptive of the
rights of the pleader. Neither has any bearing upon the right or duty of the court when a
counterclaim is presented.” Switzer Bros. v. Locklin, 207 F.2d 483, 488 (7th Cir. 1953).
See also, United Card Co. v. Joli Greeting Card Co., 1976 WL 21103, *2 (N.D. Ill. 1976).
[¶31] The district court ruled all of GSTC’s counterclaims were permissive. It stated
GSTC seemed to concede its counterclaims were permissive. The Trusts share this view,
and argue that, as a consequence, GSTC waived any argument on appeal that its
counterclaims were compulsory. We read the record differently. GSTC did not concede
its counterclaims were permissive. In its response to the Trusts’ motion to dismiss the
7
counterclaims, GSTC stated the definition of a compulsory counterclaim and argued
generally its counterclaims were “related to the subject matter of [the Trusts’] claims.”
GSTC now argues specifically that its seventh and eighth counterclaims, those alleging
lender liability and breach of the implied covenant of good faith and fair dealing, are
compulsory counterclaims. We agree.
[¶32] The Tenth Circuit has set out the following test to determine whether a claim is
compulsory under the similar Federal Rule of Civil Procedure 13:4
[A] counterclaim is compulsory if “(1) the issues of fact and
law raised by the principal claim and the counterclaim are
largely the same; (2) res judicata would bar a subsequent suit
on the defendant’s claim; (3) the same evidence supports or
refutes the principal claim and the counterclaim; and (4) there
is a logical relationship between the claim and counterclaim.”
Driver Music Co., Inc. v. Commercial Union Ins. Cos., 94 F.3d 1428, 1435 (10th Cir. 1996)
(quoting FDIC v. Hulsey, 22 F.3d 1472, 1487 (10th Cir. 1994), which cited Pipeliners
Local Union No. 798 v. Ellerd, 503 F.2d 1193, 1198 (10th Cir. 1974)).
[¶33] GSTC claimed the Trusts violated the implied covenant of good faith and fair
dealing in the note and conversion agreement by engineering a hostile takeover of WellDog
which frustrated GSTC’s ability to comply with its obligations to pay the Linklater Trust
finance note and the Meldrum Trust conversion agreement. This was also one of GSTC’s
affirmative defenses to the Trusts’ breach of contract claims. The Trusts’ claims, GSTC’s
affirmative defense to the claims, and GSTC’s counterclaims shared common issues of fact
and law including whether the parties breached the contracts and, if so, which party
breached first. The breach of contract evidence applies to the Trusts’ claims and to GSTC’s
counterclaims. Thus, there is clearly a logical relationship between the Trusts’ breach of
contract claims and GSTC’s counterclaims that the Trusts interfered with its ability to
comply with the contracts. GSTC’s counterclaims for breach of the implied covenant of
good faith and fair dealing in the Linklater Trust finance note and the Meldrum Trust
conversion agreement would be barred by res judicata in a future action. GSTC’s seventh
and eighth counterclaims were, therefore, compulsory and the district court should not have
dismissed them.
[¶34] GSTC does not argue its other counterclaims are compulsory so we will, for the
sake of this discussion, assume they are permissive. The district court concluded it had the
4
“‘In construing Wyoming rules of procedure, where Wyoming and federal rules of procedure are similar,
we have repeatedly looked to federal cases construing the federal rule as persuasive authority.’” Pena v.
State, 2013 WY 4, ¶ 48, 294 P.3d 13, 22 (Wyo. 2013) (quoting Johnson v. State, 2009 WY 104, ¶ 14, 214
P.3d 983, 986 (Wyo. 2009)).
8
discretion to dismiss the permissive counterclaims because they would unduly complicate
the case. It had no such discretion.
[¶35] The plain language of Rule 13 does not give courts discretion to dismiss
counterclaims because they would unduly complicate the litigation. To the contrary, Rule
13 makes no statement indicating a court has any discretion to dismiss either a compulsory
or permissive counterclaim. As stated above, the discretion about whether or not to bring
a permissive counterclaim belongs to the party, not the court. Switzer Bros., 207 F.2d at
488; United Card Co., 1976 WL 21103, *2. Nevertheless, the district court relied upon a
few federal district court decisions to conclude it had such discretion. See, e.g., Faunus
Grp. Int’l, Inc. v. Ramsoondar, 2015 WL 4557132, *5 (S.D. N.Y. 2015) (stating, in dicta,
that “some courts have exercised ‘a certain amount of discretion to decline to hear the
counterclaim if it would unduly complicate the litigation’”) (quoting Sec. & Exch. Comm’n
v. Republic Nat. Life Ins. Co., 383 F. Supp. 436, 438 (S.D. N.Y. 1974)); Garmin Ltd. v.
TomTom, Inc., 2006 WL 3377487, *1 (W.D. Wis. 2006) (“[T]his court has discretion to
dismiss or sever permissive counterclaims when a case would become too complex or when
a party would be prejudiced by the court’s failure to dismiss or sever.”).5 See also, Yassa
v. EM Consulting Grp., Inc., 261 F. Supp. 3d 564, 567 (D. Md. 2017) (“entertaining the
[claim and counterclaim] in the same case would unduly complicate the litigation”); Kay
v. Pantone, Inc., 395 A.2d 369 (Del. Ch. 1978) (“A court has discretion to refuse to
entertain a permissive counterclaim.”); Warren, Little & Lund, Inc. v. Max J. Kuney Co.,
796 P.2d 1263, 1265 (Wash. 1990) (en banc) (“The court has discretion to dismiss or
separate properly brought counterclaims only under certain circumstances, such as when
trying the counterclaim in the original action would unduly prejudice the plaintiff’s claim
or would substantially complicate and burden the proceedings.”); 6 Fed. Prac. & Proc. Civ.
§ 1420 (3d.ed. 2020) (“Although Rule 13(b) encourages a party to advance all
counterclaims in the responsive pleading, the court has discretion to refuse to entertain any
counterclaim, when allowing it would unduly complicate the litigation.” (footnote
omitted)).
[¶36] The D.C. Circuit took a different approach in Montecatini Edison, S.P.A. v. Ziegler,
486 F.2d 1279 (D.C. Cir. 1973). The court noted the “objective of the [rules of civil
procedure] with respect to counterclaims is to provide complete relief to the parties, to
conserve judicial resources and to avoid the proliferation of lawsuits.” Id. at 1282. See
5
The district court also cited Cheng v. AIM Sports, Inc., 2011 WL 13176754, *6 (C.D. Cal. 2011). The
cited discussion in Cheng is inapposite as it did not address discretionary dismissal of permissive
counterclaims under Rule 13. Instead, the court analyzed whether it should employ the discretion granted
under 28 U.S.C. § 1367(c) to refuse to exercise supplemental jurisdiction over the state law counterclaims.
Section 1367 codified the United States Supreme Court decision in United Mine Workers of Am. v. Gibbs,
383 U.S. 715, 725-26, 86 S.Ct. 1130, 1138-39, 1138-39, 16 L. Ed. 2d 218 (1966). Gibbs held that a federal
court has jurisdiction over a state law claim where the federal and state claims “derive from a common
nucleus of operative fact,” so that the “entire action before the court comprises but one constitutional
‘case,’” but it has discretion to decline to exercise jurisdiction over the state claim. Id.9
also, Banco, 658 F.2d at 885 (The principal goal of Rule 13(b) “is to permit the resolution
of all controversies between the parties in a single suit.”); Olin Corp., 807 F. Supp. at 1151(same). Montecatini, 486 F.2d at 1282, discussed Rule 13 and its underlying policy:
Rule 13 provides that a pleading may state any permissive
counterclaim and must state any compulsory counterclaim.
The word “may” is not intended to confer any discretion upon
the court with respect to a permissive counterclaim; rather, it
gives the litigant a choice either to assert or not to assert a
permissive counterclaim. If he elects to plead it, the court must
entertain it so long as it is within the court’s subject matter
jurisdiction. In effect, Rule 13(b) confers upon a litigant the
right to have his permissive counterclaim heard and
determined along with the claims of his adversary.
Id. (citations and footnotes omitted). “Judicial economy is best served by resolving as
many disputes as possible in a single proceeding.” Id. at 1287. See also, Power Tools &
Supply, Inc. v. Cooper Power Tools, Inc., 2007 WL 1218701, *3 (E.D. Mich. 2007) (“Rule
13(b) does not grant a court any power to refuse to hear a permissive counterclaim which
is properly pleaded.”); United States for Use and Benefit of Kashulines, 437 F. Supp. at
199 (“Rule 13(b) by its terms grants the defendant an unqualified right to interpose these
unrelated claims, and the court possesses no discretion to reject them.”); Bichler v. DEI
Sys., Inc., 220 P.3d 1203, 1209-10 (Utah 2009) (citing Montecatini in ruling the district
court erred by dismissing the defendant’s permissive counterclaim in an unlawful detainer
action). See also, United Card Co., 1976 WL 21103, *2-3 (recognizing the split of
authority regarding discretionary dismissal of permissive counterclaims and denying a
motion to dismiss some of the counterclaims because they would likewise be affirmative
defenses).
[¶37] The Trusts attempt to limit Montecatini’s holding to counterclaims brought in the
context of patent interference cases under 35 U.S.C. § 146 (1970). The D.C. Circuit’s
ruling in Montecatini was not so narrow. While the court did discuss counterclaims in
special statutory patent interference cases, it also examined the scope of Rule 13 and
specifically held the rule requires a court to entertain any permissive counterclaims which
are within the court’s subject matter jurisdiction. Id. at 1282-87.
[¶38] We agree with Montecatini and its progeny. Rule 13(b) allows the parties to assert
their independent and unrelated counterclaims against one another “in order to dispose of
all points of controversy between the litigants in one action, thereby avoiding the cost of
multiple suits.” 6 Fed. Prac. & Proc. Civ. § 1420. The rule is intended to allow the
“broadest possible joinder of permissive counterclaims.” Id. By its plain terms, Rule 13
does not provide for dismissal of counterclaims simply because they would complicate the
litigation. Any concern about the complexity of the action occasioned by adding a
10
counterclaim is addressed in other parts of the Rules of Civil Procedure, which we read in
pari materia with Rule 13.
[¶39] W.R.C.P. 42(b) states: “For convenience, to avoid prejudice, or to expedite and
economize, the court may order a separate trial of one or more separate issues, claims,
crossclaims, counterclaims, or third-party claims.” See Beavis v. Campbell Cnty. Mem.
Hosp., 2001 WY 32, ¶ 17, 20 P.3d 508, 514 (Wyo. 2001) (the district court properly
bifurcated the negligence claim against a medical assistant from the negligent hiring claim
against a hospital); State Farm Mut. Auto. Ins. Co. v. Shrader, 882 P.2d 813, 829-31 (Wyo.
1994) (because the admissibility of evidence of settlement negotiations was at issue, the
district court erred by refusing to separately try causes of action for breach of contract and
breach of the implied covenant of good faith and fair dealing). In addition, W.R.C.P. 21
allows the court to “sever any claim against any party.” See Sandwich Chef of Tex., Inc. v.
Reliance Nat’l Indemnity Ins. Co., 202 F.R.D. 212, 215-16 (S.D. Tex. 2001) (severing
permissive counterclaim under Federal Rule of Civil Procedure 21); Otis Clapp & Son,
Inc. v. Filmore Vitamin Co., 754 F.2d 738, 743 (7th Cir. 1985) (“‘[Federal] Rule 21 gives
the court discretion to sever any claim and proceed with it separately if doing so will
increase judicial economy and avoid prejudice to the litigants.’” (quoting 6 Wright and
Miller, Federal Practice and Procedure § 1591, at 823)).
[¶40] Furthermore, discretionary dismissal of claims under Rule 13 allows parties to make
an end run around Rule 12. Rule 12(b) provides specific limited bases for dismissal of
claims. Dismissal of claims as unduly complicated is not among them. Nothing in our
rules of civil procedure allows a court to add unstated reasons for dismissal to Rule 12(b).
[¶41] We hold the district court erred by dismissing GSTC’s counterclaims and reverse
and remand for further proceedings consistent with this decision.
2. Jury Instructions and Verdict Form Addressing Breach of the Implied
Covenant of Good Faith and Fair Dealing
[¶42] GSTC argues the district court erred in instructing the jury on the concepts of
material and non-material breach of the implied covenant of good faith and fair dealing.
Meldrum Trust argues GSTC waived its complaints about the jury instructions and verdict
form by failing to adequately object at trial. We have already determined it is appropriate
to reverse and remand this case. We will, therefore, address the instructions and verdict
form to provide the district court guidance on remand.
[¶43] The district court instructed the jury that Linklater Trust’s finance note and
Meldrum Trust’s conversion agreement with GSTC were valid contracts. It further
informed the jury that, in the absence of evidence the Trusts breached the implied covenant
of good faith and fair dealing, GSTC breached its obligations by failing to pay the loans.
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[¶44] The district court gave the parties’ agreed instruction on the definition of the implied
covenant of good faith and fair dealing, which informed the jury that: 1) every contract
includes an implied covenant of good faith and fair dealing which requires that neither
party commit an act that would injure the rights of the other party to receive the benefit of
the agreement; 2) compliance with the obligation to perform a contract in good faith
requires a party’s actions be consistent with the agreed common purpose and justified
expectations of the other party; 3) a breach of the covenant of good faith and fair dealing
occurs when a party interferes with, or fails to cooperate in, the other party’s performance;
4) the purpose, intentions, and expectations of the parties should be determined by
considering the contract language, the parties’ course of conduct, and industry standards;
5) the implied covenant of good faith and fair dealing may not be used to create new,
independent rights or duties beyond those agreed to by the parties; 6) the concept of good
faith and fair dealing is not limitless and must arise from the language used in the contract
or be indispensable to effectuate the intention of the parties; and 7) in the absence of
evidence of self-dealing or breach of community standards of decency, fairness and
reasonableness, the exercise of contractual rights alone will not be considered a breach of
the covenant. See City of Gillette v. Hladky Constr., Inc., 2008 WY 134, ¶¶ 30-31, 196
P.3d 184, 196 (Wyo. 2008); Scherer Constr., LLC v. Hedquist Constr., Inc., 2001 WY 23,
¶ 19, 18 P.3d 645, 653-54 (Wyo. 2001); Wyo. Civil Pattern Jury Instruction 15.06.
[¶45] The district court then instructed the jury in Instructions No. 8 and No. 9 on how to
apply the law pertaining to breach of the implied covenant. These are the instructions
GSTC takes issue with:
INSTRUCTION NO. 8
If you determine that Plaintiff Meldrum Family Trust
breached the implied covenant of good faith and fair dealing
with respect to its contract with Gas Sensing Technology
Corporation (GSTC), reflected in Plaintiff’s Exhibit #5
(Conversion Agreement), and that Plaintiff Meldrum Family
Trust’s breach of the implied covenant of good faith and fair
dealing occurred before GSTC breached its contract with
Plaintiff Meldrum Family Trust, then GSTC is entitled to
reduce the damages it owes Plaintiff Meldrum Family Trust by
those reasonably foreseeable damages that directly resulted
from Plaintiff Meldrum Family Trust’s breach of the implied
covenant of good faith and fair dealing.
If you determine that Plaintiff Linklater Family Trust
breached the implied covenant of good faith and fair dealing
with respect to its contract with Gas Sensing Technology
Corporation (GSTC), reflected in Plaintiff’s Exhibit #19
(Finance Note #3), and that Plaintiff Linklater Family Trust’s
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breach of the implied covenant of good faith and fair dealing
occurred before GSTC breached its contract with Plaintiff
Linklater Family Trust, then GSTC is entitled to reduce the
damages it owes Plaintiff Linklater Family Trust by those
reasonably foreseeable damages that directly resulted from
Plaintiff Linklater Family Trust’s breach of the implied
covenant of good faith and fair dealing.
INSTRUCTION NO. 9
A party who first commits a substantial breach of
contract cannot complain that the other party thereafter fails to
perform.
If you find that Plaintiff Meldrum Family Trust first
committed a substantial breach of its contract by virtue of a
breach of the implied covenant of good faith and fair dealing,
then GSTC is not obligated to perform.
If you find that Plaintiff Linklater Family Trust first
committed a substantial breach of its contract by virtue of a
breach of the implied covenant of good faith and fair dealing,
then GSTC is not obligated to perform.
[¶46] The completed verdict form provided:
We, the Jury, duly empaneled and sworn to try the
above-entitled cause . . . find as follows:
NEW HORIZON VENTURES PTY LTD AS
TRUSTEE OF THE LINKLATER FAMILY TRUST
The Court has determined that, in the absence of a defense by
GSTC, Plaintiff Linklater Family Trust is entitled to enforce its
[c]ontract in the [o]riginal [p]rincipal amount of $137,638.25,
with interest accruing at a rate of 17% from the date of default
to the present and it[]s reasonable attorney’s fees in enforcing
its note.
1. GSTC has asserted as an affirmative defense that
Plaintiff Linklater Family Trust breached the implied covenant
of good faith and fair dealing. Do you find, by a preponderance
of the evidence, that Plaintiff Linklater Family Trust breached
the implied covenant of good faith and fair dealing?
Yes. ___√____
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No. ________
2. If you answered “yes” to Question #1, please
find which party, by a preponderance of the evidence, first
breached the contract and/or the implied covenant of good faith
and fair dealing.
___√_____ Linklater Family Trust
_________ Gas Sensing Technology Corporation
3. If you answered “yes” to Question #1 and that
Linklater Family Trust was first to breach, do you find that
GSTC is entitled to be excused from performing its contract
with Linklater Family Trust in its entirety or is entitled to
reduce the damages it owes Linklater Family Trust? (Select
only one.)
________ No, GSTC is not entitled to be excused from
performing its contract with Linklater Family Trust in its
entirety or reduce the damages it owes to Linklater Family
Trust.
___√____ Yes, GSTC is entitled to be excused from
performing its contract with Linklater Family Trust in its
entirety.
_________ Yes, GSTC is entitled to reduce the damages it
owes to Linklater Family Trust under the contract.
4. If you answered that GSTC is entitled to reduce
the damages it owes to Linklater Family Trust, please indicate
by what amount the damages should be reduced:
$ _____________
[¶47] The district court also informed the jury that “in the absence of a defense,” Meldrum
Trust was “entitled to enforce its [c]ontract in the [o]riginal [p]rincipal amount of
$45,000.00 with interest accruing at a rate of 12% beginning on July 31, 2013.” It then
asked the same questions of the jury regarding Meldrum Trust. The jury answered that
Meldrum Trust had first breached the implied covenant of good faith and fair dealing and
that GSTC was entitled to reduce the damages it owed to Meldrum Trust under the contract
by $43,566.49.
[¶48] Obviously, the jury instructions and verdict form will have to be revised on remand
to address GSTC’s counterclaims for damages for the Trusts’ alleged breaches of the
implied covenant of good faith and fair dealing. However, there are a couple of problems
with the jury instructions and verdict form that will also need to be addressed.
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[¶49] Instruction No. 9 correctly incorporated the general rule that “‘the first party
committing a substantial breach of contract cannot complain that the other party thereafter
fails to perform, and where one party to a contract repudiates it or refuses to perform, the
injured party is not obligated to perform its promises.’” Black Diamond Energy, Inc. v.
Encana Oil & Gas (USA) Inc., 2014 WY 64, ¶ 26, 326 P.3d 904, 911 (Wyo. 2014) (quoting
Williams v. Collins Commc’ns, Inc., 720 P.2d 880, 891 (Wyo. 1986); Winter v. Pleasant,
2010 WY 4, ¶ 12, 222 P.3d 828, 834 (Wyo. 2010); Baker v. Speaks, 2008 WY 20, ¶ 14,
177 P.3d 803, 807 (Wyo. 2008)). See also, Maverick Benefit Advisors, LLC v. Bostrom,
2016 WY 96, ¶ 14, 382 P.3d 753, 758 (Wyo. 2016) (“The rule provides that a party cannot
claim the benefit of a contract that it was the first to materially breach.”). This concept is
included in Wyoming Civil Pattern Jury Instruction 15.01A: “If a party materially breaches
the contract, the non-breaching party is no longer required to continue performing under
the contract.”
[¶50] However, neither Instruction No. 8 nor Instruction No. 9 defined a substantial or
material breach for the jury.6 “In order to warrant termination or repudiation of a contract,”
a breach must be substantial or material. Seherr-Thoss v. Seherr-Thoss, 2006 WY 111, ¶
14, 141 P.3d 705, 713 (Wyo. 2006) (citing Stillwell Welding Co. v. Colt Trucking, 741 P.2d
598, 600 (Wyo. 1987)). To determine whether a breach was substantial or material, we
look to Restatement (Second) Contracts § 241 (1981, updated 2019):
In determining whether a failure to render or to offer
performance is material, the following circumstances are
significant:
(a) the extent to which the injured party will be deprived of the
benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately
compensated for the part of that benefit of which he will be
deprived;
(c) the extent to which the party failing to perform or to offer
to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to
perform will cure his failure, taking account of all the
circumstances including any reasonable assurances;
6
Some authorities use the term material breach and others use the term substantial breach. Compare Black
Diamond, supra, and Seherr-Thoss, ¶ 14, 141 P.3d at 713. Seherr-Thoss states the breach must be
substantial and material, but then analyzes the breach under the Restatement (Second) Contracts § 241
which uses only the term “material.” There is no argument in this case that there is a substantive difference
between the two terms, so we will use them interchangeably.
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(e) the extent to which the behavior of the party failing to
perform or to offer to perform comports with standards of good
faith and fair dealing.
Seherr-Thoss, ¶ 14, 141 P.3d at 713. See also, Williams, 720 P.2d at 891 (noting, with
favor, the district court’s statement that the following factors are relevant in determining
whether a breach is material or substantial: “First, the extent to which the injured party
will be deprived of the benefit which he reasonably expected; secondly, the likelihood that
the breaching party will cure its breach taking account of all the circumstances including
any reasonable assurances made; and, thirdly, the extent to which the behavior of the
breaching party comports with standards of good faith and fair dealing.”).
[¶51] GSTC argues the jury should have been instructed that any breach of the implied
covenant of good faith and fair dealing is, by definition, a material or substantial breach.
We do not agree. The extent to which the breaching party violated the standards of good
faith and fair dealing is just one of five factors considered in determining whether a breach
is material or substantial. Comment f. to Restatement (Second) Contracts § 241 confirms
that failure to comply with the standards of good faith and fair dealing is not, by itself,
determinative. It provides: “The extent to which the behavior of the party failing to perform
or to offer to perform comports with standards of good faith and fair dealing is a . . .
significant circumstance in determining whether the failure is material.” Restatement
(Second) Contracts § 241, cmt. f. However, adherence to the standards of good faith and
fair dealing “is not conclusive, since other circumstances may cause a failure to be material
in spite of such adherence. Nor is non-adherence conclusive, and other circumstances may
cause a failure not to be material in spite of such non-adherence.” Id. See also,
Accountable Health Solutions, LLC v. Wellness Corp. Solutions, LLC, 333 F. Supp. 3d
1133, 1153 (D. Kan. 2018) (citing Restatement Second (Contracts) § 241, comment f.).
[¶52] Although the jury verdict form incorporated the concept of a non-material breach of
the implied covenant of good faith and fair dealing by allowing the jury to award partial
damages, the district court did not explain the concept to the jury. If a party breaches the
contract but the breach is not substantial, it will not fully excuse the injured party from
performance. See id. Comment a. to Restatement (Second) Contracts § 241 explains that
a non-material breach may give rise to a claim for damages for partial breach. See also,
America v. Mills, 654 F. Supp. 2d 28, 33 (D. D.C. 2009) (“‘[I]f a party’s breach of a contract
is immaterial, the aggrieved party may not cancel the contract and may only sue to collect
damages resulting from the partial breach.’” (quoting Bahiman v. 3407-9-11 29th St., N.W.,
Inc., 1990 WL 108980 at *4-5 (D. D.C. July 19, 1990)); Gary’s Implement, Inc. v.
Bridgeport Tractor Parts, Inc., 702 N.W.2d 355, 370 (Neb. 2005) (it is “well-recognized
contract law that a minor breach of contract is compensable in damages”); Williston on
Contracts § 43:5 (4th ed. 2020) (“[I]f the prior breach of contract was slight or minor, as
opposed to material or substantial, the nonbreaching party is not relieved of its duty of
performance although it may recover damages for the breach.” (footnotes omitted)).
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[¶53] In summary, the jury instructions will need to be revised on remand to account for
GSTC’s counterclaims. The instructions should include a definition of substantial or
material breach of contract. They should also explain that a first material breach of contract
will fully excuse the other party’s performance, while a first non-material breach will not
excuse performance but may allow for an award of partial damages.
CONCLUSION
[¶54] Wyoming Rule of Civil Procedure 13 allows for the broadest possible joinder of
claims between parties. GSTC’s counterclaims for breach of the implied covenant of good
faith and fair dealing were compulsory counterclaims to the Trusts’ breach of contract
claims. Rule 13 does not authorize courts to dismiss permissive counterclaims simply
because they would unduly complicate the action. The district court’s dismissal of GSTC’s
counterclaims against Linklater Trust and Meldrum Trust is reversed. Linklater Trust did
not prosecute its appeal of the jury verdict in favor of GSTC; consequently, that portion of
the jury verdict stands. Neither Linklater Trust nor Meldrum Trust appealed the jury’s
findings that they first breached the implied covenant of good faith and fair dealing.
Therefore, on remand, the jury must be instructed that Linklater Trust and Meldrum Trust
first breached the implied covenant of good faith and fair dealing, and that Linklater’s
breach was a material breach. With regard to Meldrum Trust, the jury must be instructed
on the concepts and effects of a material or substantial breach of contract.
17