Granite Buick GMC, Inc. v. Ray

#27356-a-GAS
2015 S.D. 93
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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GRANITE BUICK GMC, INC.,
f/k/a MCKIE BUICK GMC, INC., Plaintiff and Appellant,
v.
ADAM RAY and GATEWAY AUTOPLEX, LLC, Defendants and Appellees,
MCKIE FORD LINCOLN, INC., Plaintiff and Appellant,
v.
SCOTT HANNA and GATEWAY
AUTOPLEX, LLC, Defendants and Appellees.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
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THE HONORABLE JANINE M. KERN
Judge
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JOHN K. NOONEY
ROBERT J. GALBRAITH of
Nooney, Solay, & Van Norman, LLP
Rapid City, South Dakota Attorneys for plaintiffs and
appellants.
ROGER A. TELLINGHUISEN
MICHAEL V. WHEELER of
DeMersseman, Jensen, Tellinghuisen
& Huffman, LLP
Rapid City, South Dakota Attorneys for defendants and
appellees.
****
CONSIDERED ON BRIEFS
ON OCTOBER 5, 2015
OPINION FILED 12/09/15
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SEVERSON, Justice
[¶1.] Adam Ray, employee of Granite Buick GMC, Inc., and Scott Hanna,
employee of McKie Ford Lincoln, Inc., signed non-compete agreements during the
course of their employment. They left their respective employment and started
their own automobile dealership, Gateway Autoplex, LLC. Granite Buick and
McKie Ford sought injunctions to enforce the non-compete agreements. A jury was
impaneled to determine Ray’s and Hanna’s affirmative defenses. The circuit court
treated the jury verdict as binding; on appeal we reversed and remanded for
findings of facts and conclusions of law. 1 On remand, the court found that the non-
compete agreements were valid pursuant to SDCL 53-9-11. However, it found in
favor of Ray and Hanna based on affirmative defenses, and therefore it did not
grant Granite Buick and McKie Ford the injunctive relief sought. Granite Buick
and McKie Ford appeal. We affirm.
Background
[¶2.] Adam Ray began his employment with Granite Buick in 2005. At the
time, Granite Buick was known as McKie Buick GMC Pontiac, Inc., and it was part
of the “McKie Automotive Group” (McKie Group) that included McKie Ford
(formerly McKie Ford Lincoln Mercury, Inc.). Therefore, Ray worked for both
Granite Buick and McKie Ford until the McKie Group split in 2012, at which time
Ray began to work exclusively for Granite Buick. In August 2006, during a weekly
meeting of sales staff, Troy Claymore, the general sales manager of the McKie
Group, presented a covenant not to compete. Ray was present at this meeting.
1. See Granite Buick GMC, Inc. v. Ray, 2014 S.D. 78, 856 N.W.2d 799.
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Claymore told the sales staff that the covenant would only be enforced against sales
people that made a “lateral move” to a competitor. Ray testified that Claymore
represented that if employees “bettered themselves” then the agreement would not
be enforced. Other individuals present at the meeting and testifying at trial
corroborated Ray’s testimony about the representations made by Claymore.
Further, Claymore also testified that he did not intend to stop anyone from
“bettering themselves” but that in his experience in the industry, dealerships do not
typically call salesmen and offer them a management position. Although the
covenant was voluntary, there were adverse employment consequences, such as
reduced commissions, if a salesperson did not agree to the covenant. Ray was
concerned about the covenant and did not sign immediately. Ray’s direct
supervisor, Darin Rittenour, testified that he pressured Ray to sign the agreement
and reassured Ray that Claymore was “a man of his word.” On August 14, 2006,
Ray signed the covenant not to compete. 2
[¶3.] McKie Ford hired Scott Hanna as a sales manager in June 2009. He
signed a non-competition and disclosure agreement that same month. 3 By the
2. It provided, in part:
On termination of my employment, for any cause whatsoever, I will not
directly or indirectly engage in the same or similar competitive line of
business, carried on by your Company, during the duration of my
employment, or engage to work for any individual, firm or corporation
engaged in the same business in your market areas for a period of one year
subsequent to such termination, such period not to include any period of
violation or period of time required for litigation to enforce the covenants.
3. It stated, in relevant part:
On termination of my employment for any cause whatsoever, I will not
engage to work for any individual, firm, or entity engaged in the same or
(continued . . .)
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summer of 2012, Ray and Hanna were exploring the possibility of opening their own
car dealership. A meeting with Daniel Porter in January 2013 led to the creation of
Gateway Autoplex, LLC. Articles of organization for Gateway Autoplex were filed
on February 8, 2013. They were signed by Porter on January 29, 2013, and by Ray
and Hanna on February 1, 2013. The same day they signed the articles, Ray and
Hanna personally guaranteed a lease agreement between Gateway Autoplex and
Forkner Limited Partnership II. They also informed their employers that they
would be terminating their employment.
[¶4.] Hanna met with McKie Ford’s sole shareholder at the time, Mark
McKie, specifically informing Mark that he was leaving to open a new dealership.
Hanna was concerned that Mark would prevent him from opening his own
dealership and that it would ruin the relationship between their families. Hanna
asked Mark whether Mark would come after him in “any way whatsoever” or
whether his departure would affect the relationship between the families. Mark
responded “Shit, no, Scotty, that will never be the case. . . . This is the car business.
. . . I wish you the best of luck.” Mark testified that at the time of their
conversation, he did not know that Hanna had signed a covenant not to compete,
and he could not recall whether he made these statements to Hanna or not. Mark
testified that it was a week after this conversation when he learned of Hanna’s
_________________________________________________
(. . . continued)
similar business or be a principal, member, or owner of any entity who is
engaged in the same or similar line of business within 200 miles of the city
limits of Rapid City for a period of one year subsequent to such termination,
such period not to include any period of violation or period of time required
for litigation to enforce the covenants.
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covenant not to compete. However, Mark did not inform Hanna of intentions to
enforce the covenant. It was about a month and a half later when Hanna learned of
the decision to enforce.
[¶5.] Also on February 1, 2013, Ray informed Ross McKie, at the time the
sole shareholder for Granite Buick, of his resignation and intent to open and
operate Gateway Autoplex. Ray met with Claymore as well that day to discuss
Ray’s departure. Claymore asked that Ray stay for two weeks in order to train a
replacement. Ray agreed and his last day of employment was February 15. No one
informed Ray that Granite Buick intended to enforce the covenant until the last day
of Ray’s employment. On that day, Ross gave Ray a letter from Granite Buick’s
attorney. The letter was dated February 7, 2013, and it informed Ray of Granite
Buick’s intention to enforce the covenant not to compete.
[¶6.] Based on these events, when Granite Buick and McKie Ford sued Ray
and Hanna, the former employees asserted a number of affirmative defenses to
enforcement of the covenants not to compete. Ray asserted fraudulent inducement,
equitable estoppel, promissory estoppel, and waiver. The court found that Ray had
met his burden to establish fraudulent inducement, equitable estoppel, and
promissory estoppel, but not waiver. Hanna asserted equitable estoppel,
promissory estoppel, and waiver. The court found in favor of Hanna on each of
these affirmative defenses. Granite Buick and McKie Ford now appeal alleging that
the circuit court erred by: (1) considering parol evidence on Ray’s defenses of
equitable estoppel and promissory estoppel; (2) determining that Ray established
the affirmative defenses of fraudulent inducement, equitable estoppel, and
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promissory estoppel; and (3) determining that Hanna established the affirmative
defenses of waiver, equitable estoppel, and promissory estoppel.
Analysis
Whether Ray established an affirmative defense.
[¶7.] Granite Buick asserts that the circuit court improperly considered
parol evidence, the conversation between Claymore and Ray prior to Ray entering
into the contract, to make its determination that Ray had established equitable
estoppel and promissory estoppel. However, the parties agree that “parol or
extrinsic evidence is admissible to prove fraud.” Poeppel v. Lester, 2013 S.D. 17, ¶
20, 827 N.W.2d 580, 585. “No matter how clear and unambiguous a contract might
be, parol evidence may be offered to show that the contract is invalid because of
fraud in its inducement.” Id. ¶ 21. Therefore, we first address whether Ray met his
burden to establish fraudulent inducement, thereby rendering consideration of the
other affirmative defenses, and the evidence relied on to establish those,
unnecessary.
[¶8.] South Dakota law provides that “apparent consent [to a contract] is not
real or free and is voidable when obtained through: . . . (2) Fraud[.]” SDCL 53-4-
1(2). The acts constituting actual fraud in relation to contracts are defined in SDCL
53-4-5. It provides:
Actual fraud in relation to contracts consists of any of the
following acts committed by a party to the contract, or with his
connivance, with intent to deceive another party thereto or to
induce him to enter into the contract:
(1) The suggestion as a fact of that which is not true by
one who does not believe it to be true;
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(2) The positive assertion, in a manner not warranted by
the information of the person making it, of that which
is not true, though he believe it to be true;
(3) The suppression of that which is true by one having
knowledge or belief of the fact;
(4) A promise made without any intention of performing
it; or
(5) Any other act fitted to deceive.
Actual fraud is always a question of fact.
SDCL 53-4-5. Granite Buick asserts that there are no facts to support the circuit
court’s determination that Ray demonstrated fraudulent inducement. According to
Granite Buick, Ray did not “better” himself by terminating his employment to
manage Gateway Autoplex (Ray went from earning a $170,000 yearly salary to
$5,000 per month) and there is no evidence that Granite Buick changed its position
that it would not enforce the covenant for employees who were actually “bettering”
themselves. Granite Buick maintains that because there was no change in its
position, there cannot be a misrepresentation which would constitute fraudulent
inducement. Ray responds that the letter he received from Granite Buick’s
attorney, dated February 7, 2013 (a week before he left his employment),
demonstrated that whether Ray “bettered” himself or not was irrelevant to Granite
Buick.
[¶9.] Based in part on this letter, the circuit court found that whether Ray
was making a lateral move or not was irrelevant to Granite in deciding whether to
enforce the covenant not to compete. Further, it found that Ray and Hanna were to
operate and carry on as co-owners of Gateway Autoplex with Daniel Porter and to
share equally in profits; Ray and Hanna undertook “personal financial
responsibilities and risks most generally associated with the ownership of a
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business rather than simply as an employee working as a manager.” Therefore, the
court found that Ray’s move to Gateway Autoplex “constitute[d] a move to better
himself.”
[¶10.] The circuit court’s findings of fact will not be set aside unless they are
clearly erroneous. SDCL 15-6-52(a). After a review of the record, we are not left
“with a definite and firm conviction that a mistake has been made.” See Miller v.
Jacobsen, 2006 S.D. 33, ¶ 19, 714 N.W.2d 69, 76. Fraud “may be proved otherwise
than by direct and positive evidence. Like other issues of fact it may be established
by inference arising from all the other facts and circumstances in evidence.” Funke
v. Holland Furnace Co., 78 S.D. 374, 378, 102 N.W.2d 668, 670 (S.D. 1960). Based
on Granite Buick’s actions, the court properly concluded that Granite Buick never
intended to perform the promise—that the covenant would only be enforced if an
employee made a lateral move—made by Claymore. See SDCL 53-4-5(4). Because
the court did not err in finding that Ray was fraudulently induced into entering the
contract, Ray had a valid affirmative defense to enforcement of the contract. He did
not need to establish additional defenses, and we need not address Granite Buick’s
remaining argument that the circuit court improperly used parol evidence to
determine that Ray had met his burden of proving equitable estoppel and
promissory estoppel.
Whether Hanna established an affirmative defense
[¶11.] McKie Ford contends that Hanna did not establish the affirmative
defenses that he alleged. The court found that he met his burden for each defense
raised. We first address Hanna’s affirmative defense of waiver. “Waiver is a
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volitional relinquishment, by act or word, of a known, existing right conferred in
law or contract.” Auto-Owners Ins. v. Hansen Hous., Inc., 2000 S.D. 13, ¶ 30, 604
N.W.2d 504, 512 (quoting Harms v. Northland Ford Dealers, 1999 S.D. 143, ¶ 17,
602 N.W.2d 58, 62). “A waiver exists where one in possession of any right, whether
conferred by law or by contract, and of full knowledge of the material facts, does or
forbears the doing of something inconsistent with the existence of the right or of his
or her intention to rely upon it.” Wehrkamp v. Wehrkamp, 2009 S.D. 84, ¶ 8, 773
N.W.2d 212, 215 (quoting W. Cas. & Sur. Co. v. Am. Nat’l Fire Ins., 318 N.W.2d 126,
128 (S.D. 1982)). McKie Ford claims that none of the elements of waiver were met
because Hanna and Mark McKie never specifically referenced the covenant not to
compete in their conversation on February 1, 2013, neither knew that it existed,
and Mark was without full knowledge of the material facts. Hanna testified that he
told Mark his plans to begin Gateway Autoplex, and that in response to the
question as to whether Mark would come after him in “any way,” Mark responded
in the negative. McKie Ford maintains that this conversation is irrelevant in light
of Mark’s testimony that he was unaware that Hanna signed a covenant not to
compete.
[¶12.] The circuit court found that when Mark responded to Hanna’s inquiry
as to whether Mark would come after Hanna, Mark “was clearly, decisively, and
unequivocally referring to the enforcement of the non-competition agreement in
that Hanna had fully informed him of his intention to open a competing dealership.”
It also found that Mark “had full knowledge of the material facts. He relinquished
his right to enforce the covenant, and that Hanna relied upon those statements.”
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Again, we are not firmly convinced that a mistake has been made. See Miller, 2006
S.D. 33, ¶ 19, 714 N.W.2d at 76. Mark was the sole shareholder of McKie Ford at
the time. Previously, he was one of three owners of the McKie Group. The non-
compete agreements had been used since 2006 and enforced in the past. Lastly,
Hanna testified at trial that Mark “knew what I meant.” The court properly made a
witness credibility determination and chose to find facts contrary to Mark’s
testimony. “[A]n appellant cannot show clear error based upon his ‘own testimony
and version of the events and not the testimony of the appellee accepted by the
[circuit] court in entering its findings. Such a biased view of the record will not
support a determination of clear error in a [circuit] court’s findings.’” Donat v.
Johnson, 2015 S.D. 16, ¶ 18, 862 N.W.2d 122, 129. Although McKie Ford seems to
argue that the non-compete needed to be specifically referenced in the conversation,
it cites no authority for such a proposition. The court did not clearly err in its
findings. The establishment of the one defense by Hanna is sufficient to uphold the
court’s decision to deny the injunctive relief sought by McKie Ford. As a result, we
do not address whether Hanna established the other affirmative defenses that the
circuit court found to exist.
Conclusion
[¶13.] The circuit court properly determined that Ray’s covenant not to
compete had been fraudulently induced. It also properly determined that McKie
Ford waived its right to enforce Hanna’s covenant not to compete. Therefore, we
affirm the court’s decision to deny Appellants the injunctive relief sought and do not
address Appellants’ remaining arguments.
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[¶14.] GILBERTSON, Chief Justice, and ZINTER and WILBUR, Justices,
and HOUWMAN, Circuit Court Judge, concur.
[¶15.] HOUWMAN, Circuit Court Judge, sitting for KERN, Justice,
disqualified.
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