IN THE NORTH DAKOTA SUPREME COURT
|McColl Farms, LLC|
|Supreme Court No. 20130053|
|Plaintiff and Appellant,|
|Pembina County No.:|
|Aaron McColl, (deceased),|
|Lisa Rae Pflaum,|
|f/k/a Lisa Rae McColl,|
|Defendant and Appellee|
PEMBINA COUNTY, NORTH DAKOTA
NORTHEAST JUDICIAL DISTRICT
THE HONORABLE RICHARD GEIGER, PRESIDING
BRIEF OF APPELLANT
|DEWAYNE JOHNSTON (ND ID # 05763)|
|ATTORNEY FOR APPELLANT|
|JOHNSTON LAW OFFICE|
|221 SOUTH 4TH STREET|
|GRAND FORKS, ND 58201|
|Ph. (701) 775-0082|
|TABLE OF CONTENTS|
|Table of Authorities.¶1|
|Statement of the Issues...¶2|
|Statement of the Case..¶3|
|Statement of the Facts....¶6|
|Standard of Review/Law and Argument.¶10|
|I. THE DISTRICT COURT ERRED IN CONTINUING|
|TO EXERCISE JURISDICTION OVER|
|A. RULE 25 DIVESTS THE DISTRICT COURT OF|
|JURISDICTION WHEN NO MOTION FOR|
|SUBSTITUTION IS made..¶10|
|B. by operation of law the deceased|
|dismissed his cause of action by|
|filing the notice of death and not|
|making the motion to substitute a|
|party at the district court level....¶14|
|C. the district court erred in|
|assessing sanctions against the|
|estate of a deceased party|
|when substitution was not ordered|
|by the court or motion by any partY.¶17|
|I. the district court erred in dismissing|
|mccoll farms complaint and in|
|particular in disposing of dispositive|
|motions based upon its finding that the|
|outcome of a stipulated divorce controls|
|mccoll farms who was not a party|
|to the divorce action.¶19|
|A. the district court erred in|
|granting defendant's motion|
|under rule 12(B)(vi) OF THE NORTH|
|DAKOTA RULES OF CIVIL PROCEDURE...¶19|
|i. COUNT I UNJUST ENRICHMENT.¶21|
|ii. COUNT IV MISAPPROPRIATION..¶23|
|iii. COUNT V RACKETEERING...¶26|
|A. THE DISTRICT COURT ERRED IN|
|GRANTING DEFENDANT'S MOTION|
|UNDER RULE 56 OF THE NORTH|
|DAKOTA RULES OF CIVIL PROCEDURE...¶31|
|B. THE DISTRICT COURT ERRED IN|
|REFUSING TO ENTERTAIN PLAINTIFF'S|
|MOTION UNDER RULE 56 OF THE NORTH|
|DAKOTA RULES OF CIVIL pROCEDURE...¶39|
|C. THE DISTRICT COURT ERRED IN|
|ITS EVIDENTIARY RULINGS REGARDING|
|i. THE DISTRICT COURT ERRED IN|
|EXCLUDING THE AFFIDAVIT OF|
|ii. THE DISTRICT COURT ERRED IN|
|EXCLUDING THE ENTIRE AFFIDAVIT|
|OF DEWAYNE JOHNSTON AND IN|
|PARTICULAR THE ATTACHED EXHIBITS¶49|
|A. THE DISTRICT COURT ERRED IN|
|MAKING FACTUAL DETERMINATIONS|
|REGARDING STATE OF MIND OF THE|
|PARTIES AND COUNSEL AS WELL AS|
|OTHER DETERMINATIONS LEFT TO THE|
|I. the district court erred in ASSESSing|
|[¶1]TABLE OF AUTHORITIES|
|Bache Halsey Stuart Shields, Inc., v. Tracy Collins Bank & Trust Co.,|
|558 F.Supp. 1045 (D.C. UT 1983)...¶27|
|Bala v. State, 2010 ND 164, 787 N.W.2d 761¶20|
|Beaudoin v. South Texas Blood & Tissue Center,|
|2005 ND 120, 699 N.W.2d 421...¶32|
|Buri v. Ramsey, 2005 ND 65, 693 N.W.2d 619..¶34|
|Celotex Corp. v. Catrett, 477 U.S. 317, 54 L.W. 4775,|
|91 L.Ed. 2d 265, 106 S Ct 2548 (1986)...¶33|
|Citizens State Bank-Midwest v. Symington,|
|2010 ND 56, 780 N.W.2d 676¶31|
|Erickson v. Brown, 2012 ND 43, 813 N.W.2d 531.¶21|
|Escareno v. Noltina Crucible and Refractor Corp.,|
|172 F.R.D. 517, (N.D.Ga. 1994)..¶15|
|Estate v. Stanton, 472 N.W.2d 741 (N.D. 1991)..¶31|
|Estate of Hill, 492 N.W.2d 288 (N.D.1992)¶21|
|F.D.I.C. v. Cromwell Crossroads Associates, Ltd. Partnership,|
|480 F.Supp.2d 516 (D.Conn. 2007).¶14|
|Filler v. Bragg, 1997 ND 24, 559 N.W.2d 225¶32|
|Finstad v. Ransom-Sargent Water Users, Inc.,|
|2011 ND 215, 812 N.W.2d 323...¶¶31, 32|
|Hagert v. Hatton Commodities, Inc., 350 N.W.2d 591,|
|Haroco, Inc. v. American Nat'l Bank & Trust Co. of Chicago,|
|747 F.2d 384 (7th Cir.1984).¶27|
|Hayden v. Medcenter One, Inc., 2013 ND 46, 828 N.W.2d 775¶21|
|In re Estate of Dionne, 2013 ND 40, 827 N.W.2d 555.¶20|
|In re Senior Cottages of Am., LLC, 482 F.3d 997 (8th Cir. 2007) ¶25|
|Kuelbs v. Hill, 615 F.3d 1037 (8th Cir. 2010)¶13|
|Laterza v. American Broadcasting Co., 581 F.Supp. 408,|
|Lewis v. Sporck, 612 F.Supp. 1316 (N.D.Cal.1985)¶27|
|Meyer v. First Nat. Bank and Trust Co. of Dickinson,|
|698 F.Supp. 798 (D.N.D.1987)¶¶27, 28|
|Missouri Breaks, LLC v. Burns, 2010 ND 221,|
|791 N.W.2d 33¶31|
|Mobil Oil Corp. v. Lefkowitz, 454 F.Supp. 59,|
|Patrick v. Sharon Steel Corp., 549 F.Supp. 1259,|
|Popp Telecom, Inc. v. Am. Sharecom, Inc., 361 F.3d 482 (8th Cir.2004)..¶25|
|Ragland v. Blue Cross Blue Shield of N. Dakota,|
|1:12-CV-080, 2012 WL 5511006 (D.N.D. Nov. 14, 2012).¶29|
|Ritter, Laber and Associates, Inc. v. Koch Oil, Inc.,|
|2004 ND 117, 680 N.W.2d ¶34|
|Riverside Park Condominiums Unit Owners Ass'n v. Lucas,|
|2005 ND 26, 691 N.W.2d 862.... ....¶32|
|Rolin Mfg., Inc. v. Mosbrucker, 544 N.W.2d 132|
|Sellie v. North Dakota Ins. Guar. Ass'n, 494 N.W.2d 151|
|Seville Indus. Machinery v. Southmost Machinery,|
|742 F.2d 786 (3rd Cir.1984)¶27|
|Simpson v. Chicago Pneumatic Tool Co., 2005 ND 55,|
|693 N.W.2d 612¶57|
|Smestad v. Harris, 2012 ND 166, 820 N.W.2d 363.¶21|
|Taylor v. Bear Stearns & Co., 572 F.Supp. 667,|
|Thompson v. Schmitz, 2009 ND 183, 774 N.W.2d 263.¶25|
|Thompson v. Schmitz, 2011 ND 70, 795 N.W.2d 913...¶23, 25|
|Wessin v. Archives Corp., 592 N.W.2d 460 (Minn.1999)..¶25|
|Williams v. State, 405 N.W.2d 615 (N.D. 1987).¶53|
|Younts v. Fremont County, Iowa, 370 F.3d 748|
|(8th Cir. 2004).... ¶¶12, 13|
|Zdanok v. Glidden Co., 288 F.2d 99,|
|(2d Cir. 1961)...¶15|
|Zuger v. North Dakota Ins. Guar. Ass'n, 494 N.W.2d 135|
|N.D.C.C. Chapter 12.106.1¶¶29, 30|
|N.D.C.C. §10-32-02.¶¶23, 25|
|N.D.R.Civ.P. 8¶¶22, 30|
|N.D.R.Civ.P. 11..¶¶17,52, 57|
|Infra Section II.B..¶42|
|N.D.R.Civ.P. 25 Explanatory Note.¶¶12, 16|
|N.D.R.Ev. 804..¶¶43, 47|
[¶2]STATEMENT OF THE ISSUES
I. Whether the District Court erred in continuing to exercise jurisdiction over a deceased party.
A. Whether Rule 25 divests the District Court of Jurisdiction when no motion for substitution is made.
B. Whether by operation of law the deceased dismissed his cause of action by filing the notice of death and not making the motion to substitute a party at the District Court level.
C. Whether the District Court erred in assessing sanctions against the estate of a deceased party when substitution was not ordered by the court or motion by any party.
II. Whether the District Court erred in dismissing McColl Farms complaint and in particular in disposing of dispositive motions based upon its finding that the outcome of a stipulated divorce controls McColl Farms who was not a party to the divorce action.
A. Whether the District Court erred in granting Defendant's Motion under Rule 12(b)(vi) of the North Dakota Rules of Civil Procedure.
B. Whether the District Court erred in granting Defendant's Motion under Rule 56 of the North Dakota Rules of Civil Procedure.
C. Whether the District Court erred in refusing to entertain Plaintiff's Motion under Rule 56 of the North Dakota Rules of Civil Procedure.
D. Whether the District Court erred in its evidentiary rulings regarding submitted Affidavits.
i. The District Court erred in excluding the affidavit of Aaron McColl.
ii. The District Court erred in excluding the entire affidavit of DeWayne Johnston and in particular the attached exhibits.
E. Whether the District Court erred in making factual determinations regarding state of mind of the parties and counsel as well as other determinations left to the fact finder.
III. Whether the District Court erred in assessing sanctions.
STATEMENT OF THE CASE
[¶3]Plaintiffs served a summons and complaint on Defendant, Lisa Pflaum "Pflaum." (D.1-2). The complaint contained five counts: (I)unjust enrichment, (II)coercion, (III)conversion/civil theft, (IV)misappropriation, and (V)racketeering. (D.1). Pflaum moved for an order dismissing the case for failure to state a claim upon which relief can be granted, for a more definite statement, a motion for sanctions, and a request to take judicial notice. (D.3;5;17). Plaintiffs moved for partial summary judgment pursuant to Rule 56. (D.31-32). Hearing on Pflaum's two motions was held April 10, 2012. Following oral arguments, the court directed the parties to submit additional briefing regarding attorneys' fees and other issues raised. Thereafter on April 30, 2012, Plaintiff, Aaron McColl "Aaron," unexpectedly passed away. Notice of Death was served on Pflaum and filed with court on May 8, 2012. (D.78-80).
[¶4] On July 19, 2012, the district court issued a Memoranda Decision. (APP.16). Court granted Pflaum's motion for dismissal regarding all counts in the complaint as to "Aaron McColl and/or his estate." Id.11:33-34. The order also dismissed Counts I, II, IV and V as to McColl Farms "McColl Farms". Id.12:1-3. As to Count III, court stated it would "consider the defendant's request for alternative relief under Rule 56 and summary judgment." Id.12:4-7.
[¶5]On December 5, 2012, district court issued its memoranda decision and order. (APP.32). Court granted defendant's summary judgment of dismissal on Count III and awarded attorney's fees and expenses in the sum of $14,500.00 to be paid by the plaintiff's attorney, DeWayne Johnston, and the plaintiff, McColl Farms, LLC, and Aaron McColl or his estate, jointly and severally. Id.17:25-28. McColl Farms filed a Motion to Reconsider/Vacate Judgment and for Additional Findings. (D.128-129). The court denied the motion to reconsider/vacate judgment, but made additional findings, limited to sanctions. (D.140).
STATEMENT OF THE FACTS:
[¶6]Aaron and Pflaum were married but divorced in December of 2009. During the marriage, Aaron had a minority interest in McColl Farms. (D.51:4;64:2,7). Aaron's mother, Cindy McColl Hughes "Cindy" held majority interest, and his sister, Katie Watson "Katie" owned the remaining interest in McColl Farms. (D.51:5;64:7). Aaron was employed by McColl Farms earning approximately $50,000 annually. (D.51:2). Pflaum was employed by her mother and earned approximately $17,000 annually. Id.:3.
[¶7]As part of his employment, Aaron had limited authority to use McColl Farms' funds and wasn't authorized to deposit funds into personal accounts or to use funds for personal use. (D.93:2). Pflaum wasn't authorized to conduct business or sign checks on behalf of McColl Farms. Id.4-5.
[¶8]Aaron and Pflaum misappropriated an estimated $650,000 from McColl Farms from March 2007 to December 2009. (D.1). Aaron and Pflaum shared joint checking account #-5701 throughout their marriage. (D.87:10). This account funneled misappropriated funds from McColl Farms. Pflaum used account #-5701 for hundreds of purchases. Pflaum alone spent $52,227.84 from account #-5701 in 2007; $100,897.79 in 2008; and $50,462.79 in 2009. (D.33,35-46). Pflaum admitted to forging Aaron's name on a crop check written to McColl Farms and receiving $400 cash back before depositing the remaining amount, $29,042.37, into checking account #-5701. (D.37:2). Id.
[¶9]Due to the acts of Aaron and Pflaum, McColl Farms fell into financial hardship and was forced to refinance and collateralize several previously owned assets. (D.93:6-8).
STANDARD OF REVIEW / LAW AND ARGUMENT
I. The District Court erred in Continuing to Exercise Jurisdiction Over a Deceased Party.
A. Rule 25 divests the District Court of Jurisdiction when no motion for substitution is made.
[¶10]Rule 25(a) states after a party's death the action only proceeds in favor of any remaining parties unless a party is brought in by substitution. N.D.R.Civ.P25(a)(1)&(2). Rule 25 was amended, effective March 1, 2011 and has yet to be considered by this court following amendment. Id. The Joint Procedure Committee changed the language of "must be dismissed" to "may be dismissed." JPC Minutes September 25, 2008, pages 20-21. The Committee recognized that there were "cases where more time is needed to determine who should substitute for the deceased." Id.
[¶11] In the case at hand, no motion for substitution was filed and no order for substitution was made. No indication or request for more time was made making the may or must dismiss irrelevant.
[¶12] N.D.R.Civ.P25 is "derived from" the Federal Civil Procedure Rule 25. N.D.R.Civ.P. 25 Explanatory Note. The Eighth Circuit has laid out the procedural posture for a dismissal under Rule 25:
When a party dies before her claim is extinguished, a court may order a substitution of the deceased party with a proper party. Fed.R.Civ.P. 25(a)(1). ... "Unless the motion for substitution is made not later than 90 days after the death is suggested upon the record by service of a statement of the fact of the death the action shall be dismissed as to the deceased party." Id.
Younts v. Fremont County, Iowa, 370 F.3d 748, 752 (8th Cir. 2004).
[¶13]The Eight Circuit has also analyzed Rule 25 in conjunction with Fed.R.Civ.P. 17 reasoning that:
[w]hen a party dies, a motion for substitution must be brought before the court may order substitution, and "[i]f the motion is not made within 90 days after service of a statement noting the death, the action by or against the decedent must be dismissed." Id. at 25(a)(1) (emphasis added). Thus, when reading Rule 25(b) in conjunction with Rule 17(a)'s requirement that an action must be prosecuted by the real party in interest, the court has no power to permit such an action to continue without the real party in interest unless a motion for substitution is brought under Rule 25(b). Kuelbs v. Hill, 615 F.3d 1037, 1042 (8th Cir. 2010).
B. By operation of law the deceased dismissed his cause of action by filing the notice of death and not making the motion to substitute a party at the District Court level.
[¶14]Filing and serving a notice of death dismissed the action and triggered the 90 day period for reviving the action by substitution. N.D.R.Civ.P. 25(a)(1); See also, Mobil Oil Corp. v. Lefkowitz, 454 F.Supp. 59, 70 (S.D.N.Y. 1977); F.D.I.C. v. Cromwell Crossroads Associates, Ltd. Partnership, 480 F.Supp.2d 516, 526 (D.Conn. 2007). Notice of the Death of Aaron was properly filed and served on May 8, 2012. (D.78-80). Because a motion to substitute was not made within the 90 day period the cause of action by Aaron was dismissed.
[¶15]Case law under the federal rule is clear that if a plaintiff to an action dies and no motion for substitution has been made, the complaint is to be dismissed as to that plaintiff. See Zdanok v. Glidden Co., 288 F.2d 99, 104-05, (2d Cir. 1961); Escareno v. Noltina Crucible and Refractor Corp., 172 F.R.D. 517, 521-22 (N.D.Ga. 1994); Patrick v. Sharon Steel Corp., 549 F.Supp. 1259, 1268 (N.D.W.V. 1982). The North Dakota Supreme Court addressed the issue of dismissing a case when a substitution of a deceased party had not been made in Sellie v. North Dakota Ins. Guar. Ass'n, 494 N.W.2d 151, 158 (N.D. 1992). The Court determined that the case was saved from dismissal for failure to formally substitute parties because a formal written statement of the fact of death had not been filed in the case, and therefore, the 90-day time limit had not been triggered. Id. In the case at hand, a formal written statement of fact of death has been filed, and the 90-day time limit was triggered.
[¶16]Although, wording in N.D.R.Civ.P.25 was amended, the changes were only meant to be stylistic. N.D.R.Civ.P. 25 Explanatory Note. Discretionary use of the word "may" merely "giv[es] the court the option to keep the action open to see if someone surfaces to step into the shoes of the plaintiff...." Joint Procedure Committee Minutes of September 25, 2008, page 21. The court had discretion to order substitution but did not and therefore could not proceed as to Aaron without substitution. The case proceeded, but only as to remaining parties. Id.
C. The District Court erred in assessing sanctions against the estate of a deceased party when substitution was not ordered by the court or motion by any party.
[¶17] Upon death, Aaron cause of action was effectively dismissed. The grievance of the court in awarding sanctions was due to Aaron and the fact that he did not dismiss prior to his untimely death. (D.40:3). The death occurred well before court made any rulings.
[¶18]Over 90 days had passed from the date of service of the death notice to the Order for Final Judgment and Order Granting Rule 11 Sanctions. (D.113). The Order provided that the award of attorney's fees and expenses in the sum of $14,500 applies to "Aaron McColl or his estate." (D.113¶17:25-28). As no motion for substitution or order was ever entered, voiding as moot the order dismissing the complaint of Aaron, no sanctions should flow from or against his complaint.
II. The District Court erred in dismissing McColl Farms complaint and in particular in disposing of dispositive motions based upon its finding that the outcome of a stipulated divorce controls McColl Farms who was not a party to the divorce action.
A. The District Court erred in granting Defendant's Motion under Rule 12(b)(6) of the North Dakota Rules of Civil Procedure.
[¶19] Pflaum filed a motion to dismiss for failure to state a claim upon which relief can be granted or for a more definite statement on December 23, 2011. (D.3). The motion requested dismissal of the entire complaint. (D.1&3). Pflaum never interposed an answer or counterclaim to the complaint. (D.).
[¶20]The court outlined the standard for Rule 12 dismissal noting a count contained within a complaint should not be dismissed unless appearing beyond a doubt that the Plaintiff can prove no set of facts which would support a claim for relief. (APP.85:2:30-34 & 3:1-16.) See also, Bala v. State, 2010 ND 164 (stating determinations on the merits are preferred to dismissal on the pleadings and a court's scrutiny of the pleadings should be deferential to the plaintiff and dismiss only if there lacks a potential for proof). The complaint outlined several facts that if taken as true, entitle McColl Farms to relief from Pflaum. (D.1). The court erred by failing to take the complaint at face value and recognize actions of Pflaum alone, and/or in concert with Aaron. The action outlined in the complaint deprived McColl Farms of its rightful property and resulted in a financially catastrophic predicament once misappropriation of funds was learned. The complaint outlined specific transfers of funds between specific bank accounts, over a long period of time with the funds landing in the personal account of Pflaum and Aaron. (D.1). Pflaum spent freely from that personal account, well over what she and Aaron earned annually, as well as endorsed and deposited a McColl check into her personal account showing more than a discernible potential of proof to support it. Rules Civ.Proc., Rule 12(b)(vi). In re Estate of Dionne, 2013 ND 40, ¶11. The Court erred in dismissing the following counts as to McColl Farms.
i. UNJUST ENRICHMENT:
[¶21]The court improperly dismissed Count I as to McColl Farms. A determination whether there has been unjust enrichment is fully reviewable as a matter of law. Erickson v. Brown, 2012 ND 43, ¶ 25, 813 N.W.2d 531. Unjust enrichment is a broad, equitable doctrine which rests upon quasi contracts implied by law to prevent a person from unjustly enriching herself at the expense of another. Hayden v. Medcenter One, Inc., 2013 ND 46, ¶14 citing Smestad v. Harris, 2012 ND 166, ¶16. The doctrine is applied in absence of an express or implied contract. Zuger v. North Dakota Ins. Guar. Ass'n, 494 N.W.2d 135, 138 (N.D.1992). Unjust enrichment requires: (1)an enrichment; (2)an impoverishment; (3)a connection between the enrichment and the impoverishment; (4)absence of a justification for the enrichment and impoverishment; and (5)an absence of a remedy provided by law. Estate of Hill, 492 N.W.2d 288, 295 (N.D.1992). The essential element in recovering under the theory is receipt of benefit by defendant from plaintiff which would be inequitable to retain without paying for its value. Zuger, at 138.
[¶22]The Complaint outlined facts that supported the theory of unjust enrichment against Pflaum. (D.1:1-31). The Court dismissed Count I holding that unjust enrichment may only be pled if there was no other remedy available at law. (APP.16:5:19-20). The North Dakota Supreme Court has held:
Rules 8 and 10, NDRCivP, require only that a "claim for relief" be set forth in a complaint, and both apply equally to claims tried to the court and claims tried to a jury. Recovery can be sought on several theories or on alternative theories.
Hagert v. Hatton Commodities, Inc., 350 N.W.2d 591, 594 (ND 1984)
After the court acknowledged that McColl Farm could pursue an unjust enrichment claim, the count was dismissed in the Rule 12(b)(vi) motion. (APP.16:5:19-20). The count should have remained as a form of relief until conclusion of litigation. Id.:5:19-20. See also, N.D.R.Civ.P.8 & 10. Dismissal of unjust enrichment was an error of law. Id.
[¶23]During the course of marriage, Aaron and Pflaum misappropriated funds from McColl Farms for their personal use. (D.1:9). A distribution from a LLC is defined as a direct or indirect transfer of money or other property, other than its own membership interest, with or with consideration. N.D.C.C. §10-32-02(20). Funds taken and subsequently spent by Aaron and Pflaum were not accounted for to other members. (D.1:10-11). Good faith means "honesty" in fact in the conduct of the act or transaction concerned. N.D.C.C. §10-32-02(31). Aaron and Pflaum converted the funds from McColl Farms for their personal use in bad faith. Id. Over the course of several years, it is estimated that $650,000 of funds rightfully belonging to McColl Farms was deposited into their personal checking account. (D.1:15-22). During this time, Pflaum was aware that Aaron was depositing large sums of farm funds and Pflaum was spending freely from the joint account. Id.:23-24. Pflaum knew that Aaron earned approximately $50,000 annually from his employment with McColl Farms. (D.51:2). A person knows or has knowledge of a fact if the person has actual knowledge of it. N.D.C.C. §10-32-02.2. Pflaum knew the crop check made payable to McColl Farms yet endorsed the check, and deposited the funds into her personal bank account after withdrawing $400 in cash from the deposit. (D.1:25)&(D.93:2-5). Pflaum was not an authorized signer on the McColl Farm banking accounts. Id. Personal liability occurs when any person who assumes to act as a LLC without authority, who then are jointly and severally liable for all debts and liabilities incurred or arising as a result. N.D.C.C. §10-32-29. Unless otherwise provided in the articles of organization, profits and losses of a limited liability company must be allocated among members, and among classes and series of members, in proportion to the value of the contribution of members reflected in the required records. N.D.C.C. §10-32-36. Pflaum and Aaron took funds from McColl without the knowledge of the other members and beyond any amount that could be argued there was proportionate distribution for their share of the ownership interest. (D.1:15-22). The wrongful taking of funds by Aaron and Pflaum forced McColl Farms into a precarious financial situation which literally brought the farm to its knees. (D.93:6-8). In North Dakota a company-shareholder has financial rights and the right to seek equitable remedies. N.D.C.C. §10-32-02(27) & N.D.C.C. §10-35-52.1 Courts are granted broad equitable powers to remedy misappropriation in the context of a closely held company. Thompson II, at ¶17 citing N.D.C.C. §10-19.1-85.1. See also, N.D.C.C. §10-32-52.1.
[¶24]The court improperly dismissed Count IV stating that misappropriation was an exclusive remedy available only regarding trade secret pursuant to N.D.C.C. §47-25.1.01. (APP.16:9:4-6). The court also held that the Count IV "repeats the claims made under Count III" and because there was no distinction, Count IV was "redundant" and the Defendant entitled to dismissal. Id. at P. 9, L. 6-10. But see, Hagert, at 594 (stating recovery may be sought on several theories at the same time).
[¶25]Corporate assets belong to the corporation, not to its shareholders. Thompson v. Schmitz, 2009 ND 183, ¶23. There are equitable remedies for misappropriation of funds for corporations. N.D.C.C. §10-32-27. See also, Thompson v. Schmitz, 2011 ND 70, ¶3. Under Minnesota law as well, "waste and misappropriation of corporate assets 'are traditional derivative claims that rightfully belong to the corporation.' " Popp Telecom, Inc. v. Am. Sharecom, Inc., 361 F.3d 482, 492 (8th Cir.2004) (quoting Wessin v. Archives Corp., 592 N.W.2d 460, 465 (Minn.1999)). See also, In re Senior Cottages of Am., LLC, 482 F.3d 997, 1002 (8th Cir. 2007). McColl Farms was a closely held LLC. N.D.C.C. §10-32-02(10). (D.1:7-8). Aaron held minority ownership interest in McColl Farms during his marriage to Pflaum. (D.1:2-3,7). N.D.C.C. §10-32-02(47). By virtue of her marriage to Aaron, Pflaum had an equitable ownership interest and associated duty in McColl Farms and in fact could have been awarded a portion of McColl Farms as part of their divorce action. N.D.C.C. §14-05-24. The court erred in dismissing the misappropriation claim and ruling that misappropriation can only apply to trade secrets.
[¶26]The court improperly dismissed Count V holding that for racketeering to survive a 12(b)(vi) dismissal, the Plaintiff must establish probable cause with two predicate acts and plead with particularity (as required by fraud) setting out specific dates, times, and places of the predicate acts of criminal activity. (APP.16:10:1-6). citing Rolin Mfg., Inc. v. Mosbrucker, 544 N.W.2d 132, 138 (ND 1996).
[¶27]The court erred in using the criminal probable cause standard in dismissing racketeering as to McColl Farms. A Plaintiff is not required to establish probable cause in the pleading stage of civil cases. Meyer v. First Nat. Bank and Trust Co. of Dickinson, 698 F.Supp. 798, 806 (D.N.D.1987). In Meyer, the Court reviewed the Bache Halsey standard which reasoned that racketeering activity is establish by showing a party has committed at least two "indictable acts" and finding probable cause exists that an offense has been committed. Id. Ultimately, the court concluded that the party must allege two acts of "racketeering" with enough specificity to show that there was probable cause that crimes were committed. 558 F.Supp. at 1045. See also Laterza v. American Broadcasting Co., 581 F.Supp. 408, 413 (S.D.N.Y.1984) (following Bache Halsey); and Taylor v. Bear Stearns & Co., 572 F.Supp. 667, 68283 (N.D.Ga.1983) (plaintiff must allege either prior conviction or probable cause with reference to predicate acts). These rulings are similar to the court ruling in this case. (APP.6:10). However, North Dakota Federal District Court "NDFDC" has ruled differently and specifically rejected the Bache Halsey court's reasoning:
In Lewis v. Sporck, 612 F.Supp. 1316 (N.D.Cal.1985), the district court found that the Bache Halsey probable cause requirement was without foundation. While the elements of proof at trial may include whether or not certain acts are "indictable," notice pleading does not. Seville Indus. Machinery v. Southmost Machinery, 742 F.2d 786, 790 (3rd Cir.1984). Moreover, the Bache Halsey standard wrongly incorporates into the civil context the requirements of criminal accusatory pleadings. 612 F.Supp. at 1324. The district court concluded that the better rule was to apply the general principles of pleading set out in Rules 8 and 9(b), Federal Rules of Civil Procedure. Meyer, at 806.
In Haroco, Inc. the court of appeals similarly rejected the Bache Halsey probable cause rule. Haroco, Inc. v. American Nat'l Bank & Trust Co. of Chicago, 747 F.2d 384 (7th Cir.1984). The court explained:
First, a determination of probable cause in the criminal context ordinarily involves some evaluation of the reliability of specific evidence. Even the most specific allegations do not establish probable cause unless they are reliable. We are, to say the least, perplexed as to how a court might undertake such evaluations of reliability in deciding a motion to dismiss under Rule 12.
With respect to Bache Halsey's discussion of grand juries, it should be recalled that a grand jury has significant investigative powers and resources, including a broad subpoena power. Before it decides to indict a person, it has extensive opportunities to discover and evaluate relevant facts. It should be obvious that a civil plaintiff has no similar discovery rights until it files its complaint.... The Bache Halsey court argued that such specificity was needed in order to evaluate the merits of a claim and to distinguish between well-founded and frivolous claims. While the court's motives are admirable, its approach seems to us to be impractical. We see no grounds for demanding that a civil RICO plaintiff essentially plead evidence and prove the case in the complaint. Meyer, at 807.
[¶28]NDFDC adopted the reasoning and found that a civil plaintiff is not required to establish probable cause at the pleading stage. Meyer, at 807. The foregoing law supports the survival of Count V beyond a Rule 12(b)(vi) motion and supports the notion that sanctions in this matter were arbitrary and unjust.
[¶29]The court acknowledged there was a civil remedy for racketeering however failed to recognize that the racketeering claim was defined under N.D.C.C. § 12.1-06.1 and not specifically set out as a RICO claim. (APP.16:9:18-21). Id.:9:24-27. cf. Ragland where in footnote 3:
The Court notes that the Plaintiffs do not allege a claim pursuant the Racketeer Influenced and Corrupt Organizations (RICO) law, N.D.C.C. Chapter 12.106.1. Under the state RICO law, a civil action may be brought based in part on various criminal offenses including extortion. See N.D.C.C. §§ 12.106.105(1) (providing a private cause of action for a "person who sustains injury to person, business, or property by a pattern of racketeering activity ..."); and 12.106.101(2)(f) (defining "racketeering" to include extortion)Ragland v. Blue Cross Blue Shield of N. Dakota, 1:12-CV-080, 2012 WL 5511006 (D.N.D. Nov. 14, 2012).
It is imperative in this matter not only for the survivability of Count V but also the imposition of Rule 11 sanctions. The pertinent portion(s) of 12.1-06.1-05 which encompasses civil remedies indicates that using defined portions of the RICO statute without alleging the elements of RICO was envisioned by the legislature:
7. Notwithstanding any law to the contrary, the initiation of civil proceedings related to violations of any offense included in the definition of racketeering or a violation of section 12.1-06.1-02 or 12.1-06.1-03 must be commenced within seven years of actual discovery of the violation.
9. The standard of proof in actions brought pursuant to this section is the preponderance of the evidence.
13. A civil action under this section is remedial and does not limit any other civil or criminal action. Civil remedies provided under this section are supplemental and not mutually exclusive. N.D. Cent. Code Ann. § 12.1-06.1-05 (West).
The court in Ragland also envisioned the use of North Dakota claims under 12.1-06.1 that does not entail RICO per se "a civil action may be brought based in part on various criminal offenses including extortion". Id. (emphasis added). The Court erred in dismissing Count V as to McColl Farms. (APP. 16)
[¶30]Additionally, as argued infra, generalized pleading is required in the complaint. N.D.R.Civ.P. 8 & 10. The complaint cited N.D.C.C.§12.1-06.1 in support of the definition of racketeering including factual information to support the Count. (D.1:9). District Court erred in holding that the generalized pleading requirements of Rules 8 and 10 did not apply to Count V. (A.16:9:22-27).
A. The District Court erred in granting Defendant's Motion under Rule 56 of the North Dakota Rules of Civil Procedure.
[¶31]"Summary judgment is a procedural device for the prompt resolution of a controversy on the merits without a trial if there are no genuine issues of material fact or inferences that can reasonably be drawn from undisputed facts, or if the only issues to be resolved are questions of law." Finstad v. Ransom-Sargent Water Users, Inc., 2011 ND 215, ¶17, 812 N.W.2d 323 (quoting Missouri Breaks, LLC v. Burns, 2010 ND 221, ¶8, 791 N.W.2d 33, 38). "The party moving for summary judgment must show [that] no genuine issues of material fact exist and [that] the case is appropriate for judgment as a matter of law." Id. The court "must also consider the substantive evidentiary standard of proof when ruling on a motion for summary judgment." Citizens State Bank-Midwest v. Symington, 2010 ND 56, ¶18, 780 N.W.2d 676. "In considering the substantive standard of proof, the court must consider whether the trier of fact could reasonably find either that the plaintiff proved his case by the quality and quantity of evidence required by the governing law or that he did not." Id. (quoting Estate v. Stanton, 472 N.W.2d 741, 743 (N.D. 1991)).
[¶32]Moreover, "[i]n considering a motion for summary judgment, the evidence must be viewed in the light most favorable to the party opposing the motion, and [that party] must be given the benefit of all favorable inferences which can be reasonably drawn from the evidence." Riverside Park Condominiums Unit Owners Ass'n v. Lucas, 2005 ND 26, ¶8, 691 N.W.2d 862. "Whether the district court properly granted summary judgment is a question of law which [the Supreme Court] review[s] de novo on the entire record." Finstad, 2011 ND 215 at ¶17. "[A] misinterpretation or misapplication of the law constitutes an abuse of discretion." Beaudoin v. South Texas Blood & Tissue Center, 2005 ND 120, ¶38, 699 N.W.2d 421 (citing Filler v. Bragg, 1997 ND 24, ¶9, 559 N.W.2d 225).
[¶33]The court abused its discretion in not allowing adequate time for discovery. In Celotex Corp. v. Catrett, 477 U.S. 317, 54 L.W. 4775, 91 L.Ed. 2d 265, 106 S Ct 2548 (1986), the United States Supreme Court stated that the plain language of Fed.R.Civ.P. 56(c), requires the entry of summary judgment, after adequate time for discovery and upon motion, against a party who failed to establish the existence of a factual dispute as to an essential element to that case on which the party will bear the burden of proof at trial. In this case, there was not an adequate opportunity to conduct discovery prior to the court dismissing the case in its entirety by summary judgment. The court asserted that by McColl Farms and Aaron making their own motion for partial summary judgment, they were "represent[ing] that there were sufficient facts to address liability in a summary manner." (D.113:6:14-18). District court failed to acknowledge the fact that Aaron, a key witness for McColl Farms, had passed away.
[¶34]The court abused its discretion in finding there were no genuine issues of material fact as it relates to moving forward with the claims. "Conversion consists of a tortious detention or destruction of personal property, or a wrongful exercise of dominion or control over the property inconsistent with or in defiance of the rights of the owner." Ritter, Laber and Associates, Inc. v. Koch Oil, Inc., 680 N.W.2d 634, 638 (N.D. 2004). "Conversion does not require bad intent on the part of the converter, but only intent to control or interfere with an owner's rights to use to an actionable degree." Buri v. Ramsey, 2005 ND 65, ¶ 14, 693 N.W.2d 619. "The gist of conversion is not in acquiring the complainant's property, but in wrongfully depriving the complainant of the property." Ritter, Laber and Associates, Inc., 680 N.W.2d at 639.
[¶35] Pflaum asserts she is innocent of conversion because she was unaware of Aaron's actions. She claims that her actions--of blindly writing checks from account #-5701, while never looking at a bank statement--shielded her from liability. (D.87:12-15). Pflaum also claims that account #-5701 was Aaron's, yet she wrote nearly four-hundred checks totaling $55,360.22 from in 2008 alone. (D.87:11). Pflaum knew their combined income was around $67,000 before tax liability, yet had no inhibitions about writing checks totaling $55,360.22 in 2008 from the account and transacting over 100 ACH debits totaling $45,537.57 for a grand total of $100,897.79. (D.64:5-6)(D.37,38,42,44). Further, Pflaum asserts that her paychecks were deposited into a different account, meaning that she believed Aaron's $50,000/year salary was the only means of income for account #-5701. (D.87:11). Because Pflaum freely spent substantially more than she knew the parties were earning, a genuine issue material fact precluding dismissal as a matter of law.
[¶36]A genuine issue of material fact exists as to the amount Pflaum transferred McColl Farm funds into the joint checking account. Although Pflaum claims she took no part in concerting money from McColl Farms, there is evidence to the contrary. Pflaum's culpability for conversion is demonstrated through, at minimum, the transaction on January 10, 2008. In that transaction, she (1) permanently deprived McColl Farms of its crop check from Kelly Bean Co. in the amount of $29,442.37; (D.37:1-3). (2) intended to and asserted a right inconsistent with someone else's right of control; (3) did not act in good faith when she deposited a check belonging to the farm while withdrawing cash for herself; Id. and (4) eventually causing financial hardships for McColl Farms through similar and compounded actions, forcing it to refinance and collateralize several assets.
[¶37] Pflaum did not have the authority to deposit and withdraw funds from a check belonging to McColl Farms, a fact of which she was well aware of and freely admits. (D.87:5). When Pflaum deposited the check into personal account #-5701 and then withdrew cash funds, Pflaum manifested the intent to deprive McColl Farms of its property. (D.37:2). Pflaum knew she didn't have the authority to touch McColl funds and knew the behavior was wrong, but she did it anyway. Id.
[¶38]The court stated that "[t]he exhibits merely presented voluminous pages of bank statements from the joint account...." (D.113:33-34). A mere glance through the documents shows that the account #-5701was not "Aaron's account" as Pflaum asserted, but rather Pflaum had written hundreds of checks as well as made numerous deposits. McColl Farms specifically provided the check Pflaum deposited that she had no right to. (D.92:11).
B. The District Court erred in refusing to entertain Plaintiff's Motion under Rule 56 of the North Dakota Rules of Civil Procedure.
[¶39]The court improperly declined to rule on McColls' Motion for Partial Summary Judgment. The court ordered, "Having disposed of the entire action commenced in favor of the defendant, the plaintiffs' motion for summary judgment is in all things dismissed without need for ruling." (D.113:17:22-24). McColls' motion was filed on March 7, 2012 and prior to Pflaum's Motion for Summary Judgment. (D.31).
[¶39a]Under N.D.R.Civ.P. 56(d)(1):
If summary judgment is not rendered on the whole action, the court shall, to the extent practicable, determine what material facts are not genuinely at issue. The court shall so determine by examining the pleadings and evidence before it and by interrogating the attorneys. It shall then issue an order specifying what facts, including items of damages or other relief, are not genuinely at issue.
C. The District Court erred in its evidentiary rulings regarding submitted Affidavits.
i. The District Court erred in excluding the affidavit of Aaron McColl.
[¶40]This error is complex and compound as several events occurred setting off a domino effect toppling each action of this case until the case was entirely extinguished. First, Aaron, one of the main witnesses, passed away shortly after the commencement of the suit against Pflaum. Aaron's death was unexpected by all parties, and therefore his affidavit was not made in anticipation of his death. Aaron's affidavit was his last testimony on this matter, and should have been considered in the course of this case, in the interests of justice. (D. 51).
[¶41]Second, Cindy and Katie eventually learned of Aaron and Pflaum's actions of the conversion and misappropriation of funds from McColl Farms. Cindy executed an affidavit regarding these facts based on her personal knowledge. (D.93). Aaron had firsthand knowledge but his affidavit was seemingly not considered. (D.51). Although Cindy did not know at the time, eventually, she gained personal knowledge of the missing funds and hearing Aaron's confession, which was a statement against his interest. (D.93:11). Cindy's knowledge was from the various bank records and the farms finances. Id.¶¶6-9. The Court excluded relevant sections of Cindy's affidavit regarding Aaron's confession in error.
[¶42]Third, the Court denied the right to conduct further discovery, thus preventing McColl Farms from the right to litigate the case. (D.113:6:23-24). (See Infra Section II.B.).
[¶43]Finally, the Court erred in excluding Aaron's affidavit as it contained statements against his interest, and therefore, fell under that exception to the hearsay rule.
(3) Statement Against Interest. A statement that was at the time of its making so far contrary to the declarant's pecuniary or propriety interest, or so far tended to subject the declarant to civil or criminal liability or to render invalid a claim by the declarant against another or to make the declarant an object of hatred, ridicule, or disgrace, that a reasonable person in the declarant's position would not have made the statement without believing it to be true.... N.D.R.Ev. 804(b)(3)(emphasis added).
[¶44]The Court's underlying rationale for this hearsay exception was that the statement be made under circumstances in which the declarant had no probable motive to falsify the declaration. (D.113:10:3-6). The court found that Aaron's statements are not statements against his interest as he has joined McColl Farms in the action and that would support a favorable outcome to for both Aaron and McColl Farms. Id.12-21. This is an improper analysis as the court overlooked the timing of the confession and the affidavits. At the time Aaron made the confession to his mother, Cindy, this action had not commenced. (D.93:10). Upon confessing, Aaron subjected himself to criminal charges as well as punishment from the remaining LLC members. Id.13-15. If Aaron had only accused Pflaum and took no blame then his statement would not be against interest. However, presented out as it was, the statement was against Aaron's interest and should have been admissible under the exception to the hearsay rule.
[¶45]Conversely, in the event the court found the affidavit should be excluded as a statement against interest, the Plaintiff requested the court apply the residual exception to the hearsay rule. North Dakota Rules of Evidence Rule 807 provides a residual exception to the hearsay rule:
A statement not specifically covered by Rule 803 or 804 but having equivalent circumstantial guarantees of trustworthiness, is not excluded by the hearsay rule, if the court determines (A) the statement is offered as evidence of a material fact; (B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and (C) the general purposes of these rules and the interests of justice will best be served by admission of the statement into evidence. However, a statement may not be admitted under this exception unless the proponent of it makes known to the adverse party and to the court in writing sufficiently in advance of its offer in evidence to provide the adverse party with a fair opportunity to prepare to meet it, the proponent's intention to offer the statement and the particulars of it, including the name and address of the declarant. N.D.R.Ev. 807.
[¶46]Although recognized that Rule 807 was not meant to be applied in every case, special circumstances existed due to Aaron's unexpected passing. Aaron's affidavit was offered as evidence of a material fact. Because Aaron was a co-wrongdoer and shared a checking account with Pflaum, his affidavit was more probative on the point for which it was offered than any other evidence presented to the court.
[¶47]The court also found that any statements by Aaron to Cindy are not admissible as evidence. (D.113:11:9-14). Even if the Court chose to exclude Aaron's affidavit testimony because it did not qualify as an exception to the hearsay rule, the same statements, made to Cindy and evidenced in her own affidavits, should have been admissible under the double hearsay "statement against interest" exception to the hearsay rule. Rule 804 of the North Dakota Rules of Evidence exists for precisely this situation, and makes Aaron the textbook "unavailable" witness. See N.D.R.Ev. 804(a)(4) ("Unavailability as a witness" includes situations in which the declarant--is unable to be present or to testify at the hearing because of death or then existing physical or mental illness or infirmity.") Rule 804 defines "Statement Against Interest" as:
"A statement that was at the time of its making so far contrary to the declarant's pecuniary or proprietary interest, or so far tended to subject the declarant to civil or criminal liability or to render invalid a claim by the declarant against another or to make the declarant an object of hatred, ridicule, or disgrace, that a reasonable person in the declarant's position would not have made the statement without believing it to be true."
[¶48]The Court found, "it is undisputed that Aaron misappropriated and otherwise converted some amount of funds belonging to McColl Farms without accounting for them first." (D.113:11:20-22). The Court found that Pflaum did place a McColl Farm "elevator check" into the parties' joint checking account on one occasion. Id.11:29-32. When these two acts are considered jointly, it appears that Aaron's confession to his mother holds weight and should have been considered by the court, or the court should have allowed further discovery, especially since the Court had never set a discovery deadline. Therefore, the court erred in excluding Aaron's affidavit and statements made by Aaron presented in Cindy's Affidavit. (D.93).
ii. The District Court erred in excluding the entire affidavit of DeWayne Johnston and in particular the attached exhibits.
[¶49]The court deemed the Affidavit of attorney Johnston with accompanying exhibits inadmissible and would not use the exhibits while considering Pflaum's Summary Judgment Motion. (D.112:4:18-21). Portions of the Affidavit of DeWayne Johnston were factual assertions, however, the remainder of the Affidavit was merely authentication of exhibits used in support of the Motion for Partial Summary Judgment. (D.33;32). It was not in the interest of justice to completely strike exhibits which are pertinent evidence, and highly relevant to the motion before the court. In considering Pflaum's Motion for Summary Judgment, the court should have considered any and all relevant exhibits and testimony, especially exhibits already part of the record. (D.35-46).
[¶50]Although the exhibits referenced were technically attached to counsel's affidavit in support, they were cited directly throughout the brief, and were submitted for the purpose of supporting the factual content in the brief. (D.32). The only statements counsel made in his accompanying affidavit as to the individual exhibits were statements authenticating each exhibit, as is required by the rules. N.D.R.Civ.P. 56(e)(1).(D.33). As the exhibits were part of the record, the court erred in not considering the exhibits as evidence before fully disposing of the case. (D.32,35-46). McColl Farms also referred to the exhibits in their reply to Pflaum's Motion for Summary Judgment. (D.92). The issues McColl Farms addressed in their Motion for Partial Summary Judgment were essentially the same issues that the court took under advisement. (D.31). The first Motion for partial summary judgment filed by McColl Farms was not disposed of by district court prior to its Decision and Order for Final Judgment and therefore the exhibits attached to support that motion were still available for reference. (D.35-46).
[¶51]The exhibits excluded were necessary to support the McColl Farm's motion for summary judgment. As the case had not yet been afforded the full process of discovery, the documents were essential to keep the remaining claim alive. That being said, as the documents to which Cindy refers in support of her affidavit are already contained within the record, McColl did not see a need to resubmit the documents into the Court's docket. (D.35-46).
D. The District Court erred in making factual determinations regarding state of mind of the parties and counsel as well as other determinations left to the fact finder.
I. The District Court erred in assessing sanctions.
[¶52]The district court's judgment assessing Rule 11 sanctions is improper and should be reversed. The North Dakota Supreme Court reviews Rule 11 findings under a clearly erroneous standard. N.D.R.Civ.P.11(b). The North Dakota Rules of Civil Procedure 11(b) requires that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances the matter has merit.
[¶53] In this case, the Counts were thoroughly investigated before pleading and evidence was presented by check number, date, and amount. (D. 35-46). "Ifthe court determines that Rule 11(b) has been violated, the court may impose an appropriate sanction on any attorney, law firm, or party that violated the rule for is responsible for the violation." N.D.R.Civ.P.11(c)(1). "The sanction may include nonmonetary directives; an order to pay a penalty into court; or, if imposed on motion and warranted for effective deterrence, an order directing payment to the movant of part or all of the reasonable attorney's fees and other expenses directly resulting from the violation." N.D.R.Civ.P.11(c)(4). This rule requires a Court to impose appropriate sanctions where an attorney or unrepresented party fails to make reasonable inquiry into the facts and the law to determine whether the pleading is signed in compliance with the rule. Williams v. State, 405 N.W.2d 615 (N.D. 1987).
[¶54] The Court erroneously found that attorney Johnston brought the cause of action without with legal arguments that lacked a legal foundation and/or lacked factual basis for them, but finally agreed to go forward with the action. (Id.:5:33-35). McColl Farms has a legal right to recovery any portion of the estimated $650,000 of misappropriated funds taken between 2007 and 2009 from Aaron and Pflaum. The court acknowledged that the money was in fact taken from McColl Farms and placed in the joint account of Aaron and Pflaum but yet dismissed every count for arbitrary reasons. Likewise Pflaum's spending was highlighted along with the couple's annual income. (D.87:10)(D.33:35-46). The complaint showed that Pflaum spent freely from personal checking account #-5701 including hundreds of purchases well beyond what Pflaum knew their household disposable annual income to be. (D.87:10)(D.33:35-46). Pflaum admittedly forged Aaron's signature on a crop check payable to McColl Farms and went to the back to deposit $29,042.37 receiving $400 cash back for herself. (D.37:2). That one check, forged by Pflaum on behalf of McColl, was approximately 43% of the amount Pflaum knew her and Aaron's pretax annual income to be. Id. McColl Farms did have standing to bring an independent claim and did present factual statements and legal theories in its complaint which should allow recovery or contribution from Pflaum.
[¶55]The court without rationale basis concluded the claims "were motivated by an effort to undo a divorce settlement". (D.113:15-17). If the Court believed that was true, the Court could have dismissed Aaron and allowed McColl Farms the legal rights they are entitled to. The Complaint filed by McColl Farms in this case does provide facts and law that a reasonable person could expect a favorable judgment. (D.1).
[¶56]The court erred in granting sanctions under Rule 11(c)(2), "[a] motion for sanction... must describe the specific conduct that allegedly violates Rule 11(b)." Pflaum did not describe the specific conduct of McColl Farms that allegedly violated Rule 11, rather focused on how Aaron violated Rule 11. The only reference to McColl Farms was by privity. (D.17:3). The court found that privity did not exist between McColl and Aaron. (APP.18:8:25-33).
[¶57]The court improperly held McColl and attorney Johnston jointly and severally liable. "The court must not impose a monetary sanction against a represented party for violating Rule 11(b)(2)." See Simpson v. Chicago Pneumatic Tool Co., 2005 ND 55, ¶19, 693 N.W.2d 612.
[¶58]Rule 11 does not provide or allow district court to turn a Rule 11 sanction into a money judgment against legal counsel. Matrix Properties Corp. v. TAG Investments, 2002 ND 86, ¶11. A Rule 11 sanction is not a judgment on the merits of an action. Id. In this case, the court docketed a joint and several money judgment between a deceased party, a remaining Plaintiff and a non-party lawyer. There are many facts and legal theories which are sound and should be available to McColl Farms regarding the misappropriation of funds by Pflaum and Aaron. The District court erroneously held that there was "no extraordinary circumstances supporting relief" in this case. (A.51:3:3-4). The Court's ruling is not supported by the facts and evidence in this matter.
[¶59]Finally, sanctions and attorney's fees are routinely awarded concerning order to show cause proceedings, discovery violations, paternity actions, and in divorce and child custody cases. The award of attorney's fees in all of these instances do not turn into personal money judgments unless there is non-compliance with the Court's order and recourse is taken against the offending party for enforcement of the unpaid award. The awards of costs to prevailing parties concerning appeals to the Supreme Court are not docketed as personal money judgments. The few instances that it appears attorney's fees are docketed as personal money judgments appear to be for either (1) non-payment pursuant to the order or (2) by contract. Working Capital No. 1, LLC v. Quality Auto Body, Inc., 2012 ND 115, ¶14. Pflaum was not awarded any monetary value before the dismissal of the case as damages. Plaum never answered the complaint or presented a counterclaim for damages. Pflaum was simply awarded attorney's fees which have been deposited with district court pending appeal. The court abused its discretion by docketing the award of attorney's fees as a money judgment against McColl Farms and attorney Johnston personally.
[¶60]The court erred in addressing the complaint of Aaron in subsequent orders dismissing his cause of action and as a basis for assessing sanctions and attorney's fees. The court impermissibly dismissed by Rule 12(b)(vi) McColl Farms claims relating to misappropriation, unjust enrichment, and racketeering. The court further erred in discarding relevant and admissible evidence in determining that there existed no facts in dispute entitling Pflaum to judgment as a matter of law on the conversion claim. McColl Farms presented solid and irrefutable evidence that Pflaum should be found liable for her acts against McColl Farms and respectfully requests that this Court reverse the court's dismissal of the motion for partial summary judgment and enter judgment in McColl Farms favor. The district court based an award of sanctions and attorney fees on matters unsupported by law and as such must be set aside. The judgment rendered by the district court should be reversed and the issue remanded to set a scheduling order for trial on damages.
|Respectfully submitted this 2nd day of May, 2013.|
|JOHNSTON LAW OFFICE|
|/s/ DeWayne Johnston|
|DeWayne Johnston (ND ID #05763)|
|221 South 4th Street|
|Grand Forks, ND 58201|
|Ph.(701) 775-0082/Fax (701) 775-2230|
|Attorney for Appellant|