Environmental Trust, LLC v. Hi-Tek Rubber, Inc., Gordon Cell

• Court: Court of Appeals of Minnesota
• Decided: August 22, 2016
• Docket: A15-1942
• Status: Unpublished

Opinion

This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2014).

STATE OF MINNESOTA IN COURT OF APPEALS A15-1942

Environmental Trust, LLC, Respondent,

vs.

Hi-Tek Rubber, Inc., Defendant,

Gordon Cell, Appellant.

Filed August 22, 2016 Reversed Kirk, Judge

Isanti County District Court File No. 30-CV-14-28

Dwight G. Rabuse, DeWitt Mackall Crounse & Moore, S.C., Minneapolis, Minnesota (for respondent)

Paula Duggan Vraa, Stephanie L. Chandler, Larson King, LLP, St. Paul, Minnesota (for appellant)

Considered and decided by Kirk, Presiding Judge; Connolly, Judge; and Larkin,

Judge.

UNPUBLISHED OPINION

KIRK, Judge

Respondent Environmental Trust, LLC (Environmental) sued defendant Hi-Tek

Rubber, Inc. (Hi-Tek) and its president, appellant Gordon Cell. Cell was sued for breach of contract, unjust enrichment, breach of statutory and common-law fiduciary duty,

conversion, fraud, and intentional and negligent misrepresentation. A jury found in favor

of Environmental on all counts and awarded damages. Cell moved for JMOL or for a

new trial. Environmental moved for attorney fees and costs. The district court filed an

order awarding Environmental attorney fees and costs and denying Cell’s motion for

JMOL. On appeal, Cell argues that the district court erred when it denied his motion for

JMOL because Environmental lacked standing to sue him in his personal capacity and

because Environmental did not suffer an injury-in-fact. Cell also argues that the district

court erred when it awarded attorney fees and costs to Environmental. We reverse.

FACTS

Cell formed Hi-Tek in 1999 and has since served as its president. Cell has always

held a significant ownership interest in Hi-Tek. From 1999-2007, Hi-Tek worked to

develop and manufacture rubber roof shingles from used tires, but failed to become

profitable.

In 2007, Hi-Tek needed additional funding and approached Guaranty Bank of

Iowa to explore funding options. Guaranty Bank agreed to issue a line of credit of up to

$1,000,000, for the purpose of funding Hi-Tek, if it was backed by personal guaranties by

qualified individuals.1 Ten of the 12 original guarantors of the line of credit were Hi-Tek

shareholders. Cell hired an attorney to assist him in forming Environmental as an

1 The highest the line of credit ever guarantied and extended to Environmental was $650,000.

2 organization comprised of personal guarantors investing in Hi-Tek. All 12 of the original

Environmental members executed guaranties to secure a portion of the line of credit.

In November 2007, the Articles of Organization for Environmental were filed.

Cell signed the Articles of Organization. On December 28, Cell signed Environmental’s

Operating Agreement as one of the three original governors. Cell also served as the

president and the chief manager of Environmental. Cell remained president of

Environmental until he resigned on January 21, 2011. Cell was never an Environmental

member.

According to its Member Control Agreement (MCA), Environmental “was created

as a financing tool for Hi-Tek.” The only members of Environmental were the personal

guarantors of the line of credit to fund Hi-Tek. Each guarantor guaranteed $55,000 as a

“contribution.” The MCA provided that the guarantors had no right against

Environmental to return any of the funds paid pursuant to the personal guaranties.

Furthermore, Environmental’s MCA included the following provision:

2.5 Loan to Hi-Tek. The Members hereto understand and acknowledge that the purpose of procuring the Loan is, and will be, to provide financing to Hi-Tek. As such, Hi-Tek and [Environmental] shall enter into a separate promissory note and security agreement for purposes of [Environmental] loaning said Loan amount to Hi-Tek. Under no circumstances shall the Members or the Board of Governors of [Environmental] consent to the loan to Hi-Tek as herein described until such time as the aforementioned promissory note, security agreement and Option Agreement . . . between [Environmental] and Hi-Tek are properly executed and acknowledged.

3 Although Cell was not an Environmental member and did not sign the MCA, the

MCA also contained the following provision granting him authority to handle

Environmental’s banking, as well as all financial transactions between Environmental

and Hi-Tek:

6.1 Banking Authorization. Pursuant to the terms of this Agreement Gordon Cell is hereby authorized, as President and Chief Manager, to open any such accounts with banks, trust companies and other financial institutions in the name and on behalf of [Environmental] as may be deemed necessary and appropriate for the conduct of [Environmental’s] business, subject to the terms and conditions set forth herein. In addition, Gordon Cell is hereby authorized to sign or countersign checks, receipts, transfers, money orders and/or any other type of payment or withdrawal of funds or monies deposited to the credit of [Environmental] in such banks, trust companies, and other financial institutions designated by [Environmental], including but not limited to, Guaranty Bank and Trust, and to take any other action as deemed appropriate with respect to such accounts. Gordon Cell is also hereby authorized to facilitate any and all financial transactions between Hi-Tek and [Environmental].

Cell testified at trial that not all of Environmental’s members signed the MCA.

Two signed copies of the MCA were entered into evidence. Those MCAs were signed by

three Environmental members: Wayne Engle, Eugene Dowie, and William Bishop.

Additionally, Richard Christiansen, a fourth Environmental member, testified that he

signed and returned his copy of the MCA. Cell testified that he never saw the MCAs

signed by Bishop or by Christiansen. Cell also testified that he did not consider the MCA

to be valid. Hi-Tek never secured the loan as required by § 2.5 of Environmental’s

4 MCA. Cell testified that he never executed a promissory note for Hi-Tek in favor of

Environmental and has never seen such a note.

In December 2007, prior to executing their guaranties, all 12 original

Environmental members received a copy of the MCA from Cell. Christiansen testified at

trial that he relied on the MCA’s assurance that Hi-Tek would secure the loan with a

promissory note to protect his investment. The personal guaranties provided that

Guaranty Bank could pursue the guarantors directly if Hi-Tek defaulted on its repayment

obligations, rather than pursuing collection from Environmental. In order to continue to

use Environmental’s line of credit, Hi-Tek was required to make interest payments on the

loaned amount. Hi-Tek successfully made interest payments on Environmental’s line of

credit from 2008 through 2010.

Cell was also authorized, effective December 28, 2007, “as Chief Manager and

President [of Environmental,] . . . to execute any and all documents necessary to obtain

the loan/line of credit from Guaranty Bank as provided in the [MCA].” Cell signed the

authorization as one of Environmental’s governors.

In early 2011, Gary Young, the current president of Environmental, tried to locate

the Hi-Tek promissory note required by Environmental’s MCA. Cell told Young that he

would look for it, and then later informed Young that the note did not exist. Beginning in

January 2008, Cell began making withdrawals on Environmental’s line of credit for

immediate transfer to Hi-Tek despite knowing that there was not a promissory note or

security agreement in place. Cell did not inform Environmental’s members that he was

using funds from the line of credit without executing a promissory note or security

5 agreement on behalf of Hi-Tek. Furthermore, Cell testified that he told Environmental’s

members that the line of credit would be used to promote the commercialization of Hi-

Tek’s product without disclosing that Hi-Tek had substantial unpaid debts, including

judgments against Hi-Tek in favor of previous lenders.

When the line of credit was established, Hi-Tek had physical assets that could

have been pledged to secure the line of credit. However, on March 15, 2009, a fire at Hi-

Tek’s Minnesota plant destroyed some of Hi-Tek’s inventory and equipment. Following

the fire, the facility suffered additional losses due to theft and vandalism. Hi-Tek’s assets

were not insured.

In April or May of 2009, following the fire, Cell recruited Barnett Brenner to

become an additional Environmental member and to sign a stock-option agreement and a

personal guaranty toward the line of credit. Cell also signed the Brenner stock-option

agreement on behalf of Hi-Tek. The stock-option agreement referenced Environmental’s

MCA more than once. Cell did not inform Brenner that he considered the MCA to be

invalid. Cell also failed to inform Brenner of the fire before Brenner executed a

$110,000 personal guaranty toward the Environmental line of credit. Brenner first

learned about Hi-Tek’s lack of assets in late 2009 when he confronted Cell.

Funds from the line of credit were used for Hi-Tek’s business expenses, including

officer salaries, from 2008 through 2011. Cell’s salary payments from Hi-Tek from 2008

through 2011 averaged $79,000 per year. Various members of Cell’s family were also

placed on Hi-Tek’s payroll during that time period.

6 In July 2011, after learning that Hi-Tek had not executed a promissory note or

security agreement in favor of Environmental, Young attempted to get Hi-Tek to execute

the security documents as required by Environmental’s MCA. Hi-Tek elected not to

execute those documents and the money withdrawn from Environmental’s line of credit

remained unsecured.

In 2011, Hi-Tek could not pay on the interest payments and announced that it was

going to default on the line of credit. To prevent default, the guarantors used their

personal funds to make interest payments on the loan and to pay off the line of credit.

The total amount of the loan plus interest repaid by Environmental’s members was

$675,730.39.

In 2014, Environmental sued Cell for breach of contract, unjust enrichment,

breach of statutory and common-law fiduciary duty, conversion, fraud, and intentional

and negligent misrepresentation. A jury found in favor of Environmental on all counts

and awarded damages totaling $675,730.09. The district court filed an amended order

awarding pre-judgment interest in the amount of $161,732.48. Cell moved for JMOL or

for a new trial and Environmental moved for attorney fees and costs. The district court

filed an order awarding Environmental attorney fees and costs and denying Cell’s motion

for JMOL. Cell appeals.

DECISION

On appeal, Cell argues that the district court erred when it denied his motion for

JMOL because Environmental lacked standing to sue him in his personal capacity and

because Environmental did not suffer an injury.

7 “Standing is a legal requirement that a party have a sufficient stake in a justiciable

controversy to seek relief from a court.” Fed. Home Loan Mortg. Corp. v. Mitchell, 862

N.W.2d 67, 70 (Minn. App. 2015) (quoting Enright v. Lehmann, 735 N.W.2d 326, 329

(Minn. 2007)), review denied (Minn. June 30, 2015). A party’s claim cannot be

considered by a court if that party lacks standing. Garcia-Mendoza v. 2003 Chevy Tahoe,

852 N.W.2d 659, 663 (Minn. 2014). “The purpose of the standing requirement is to

ensure that issues before the court will be vigorously and adequately presented.” State ex

rel. Hatch v. Allina Health Sys., 679 N.W.2d 400, 404 (Minn. App. 2004) (quotation

omitted). We review de novo whether a party has standing. Mitchell, 862 N.W.2d at 70.

“A party may gain standing either by suffering an injury-in-fact or by virtue of a

legislative enactment granting standing.” Id. In order to establish an injury-in-fact, a

“plaintiff must show a concrete and particularized invasion of a legally protected

interest.” Garcia-Mendoza, 852 N.W.2d at 663 (quotation omitted). That injury must

also “be fairly traceable to the challenged action of the defendant and likely to be

redressed by a favorable judicial decision.” Id. “Standing is a jurisdictional issue that

may be raised at any time.” Id. “[T]he question of standing cannot be waived.” In re

Horton, 668 N.W.2d 208, 212 (Minn. App. 2003).

A. Environmental did not suffer an injury-in-fact.

Cell points out that, because the guarantors signed the guaranties in their personal

capacities rather than in their representative capacities as Environmental members, they

were personally liable for those debts rather than the limited liability company (LLC).

See Jenista v. Burlington N. Airmotive, Inc., 388 N.W.2d 770, 772 (Minn. App. 1986)

8 (holding that business owner was personally obligated on a promissory note because he

signed his name to it without indicating that he had signed it in his representative

capacity).

Environmental contends that it suffered damages exceeding $650,000 because

Guaranty Bank sought repayment of the loan first from Environmental, then, when

Environmental could not pay, it called upon Environmental’s members to honor the

guaranties and repay the loan. Environmental also asserts that Cell caused this injury-in-

fact by failing to execute the required promissory note or security agreement before

drawing on the line of credit.

Environmental was never a party to the loan agreement or personal guaranties and

never experienced harm or injury related to Cell’s failure to secure the line of credit.

Environmental was not required to pay on the line of credit, and there is no evidence in

the record that Environmental experienced any negative consequences related to Hi-Tek’s

ultimate failure to repay the line of credit. At oral argument, Environmental argued that

its credit score and ability to obtain future funding may have been negatively impacted,

but there is no evidence of that in the record. Additionally, because the personal

guarantors honored their repayment obligations, there was no default on the line of credit

and Guaranty Bank was made whole. Because Environmental was not a party to the

relevant agreements, and because Environmental did not experience an injury-in-fact,

Environmental lacked standing to sue Cell.

Environmental argues in the alternative that, even if Environmental’s members

experienced the injury rather than Environmental, it still has standing to sue for the

9 benefit of its members because it is the entity capable of ensuring that the claims brought

would be “vigorously and adequately presented.” Allina Health Sys., 679 N.W.2d at 404

(quotation omitted). But simply being able to vigorously litigate a claim “cannot

substitute for a direct interest in the matter at issue.” State by Humphrey v. Philip Morris

Inc., 551 N.W.2d 490, 495 (Minn. 1996). Vigorous litigation of claims is the purpose of

the standing requirement, not something that grants standing in and of itself. In re Block,

727 N.W.2d 166, 174 (Minn. App. 2007) (“The entity seeking standing must have a

sufficient stake in a justiciable controversy to seek relief from a court, and the goal of this

requirement is to ensure that issues before the courts will be vigorously and adequately

presented.” (quotations omitted)).

B. There is no legislative enactment granting Environmental standing.

Environmental also points to Minn. Stat. § 322B.88 (2014) as a legislative source

of standing in this case. It argues that Minn. Stat. § 322B.88 confers standing on

Environmental and prevents Environmental’s members from pursuing a claim under

these circumstances. However, Minn. Stat. § 322B.88 provides that an LLC member “is

not a proper party to a proceeding by or against [an LLC] except when . . . the proceeding

involves a claim of personal liability or responsibility of that member and that claim has

some basis other than the member’s status as a member.” Here, Environmental’s

members signed personal guaranties related to their Environmental membership, but not

as Environmental members. The claims pursued by Environmental involved personal

liabilities or responsibilities of the guarantors, and were based on the executed personal

guaranties, not on their Environmental membership. Thus, Minn. Stat. § 322B.88 does

10 not prevent Environmental’s members from suing, and does not grant Environmental

standing to sue on their behalf.

Because Environmental was not a party to the relevant agreements, did not

experience an injury-in-fact, and was not granted standing by Minn. Stat. § 322B.88,

Environmental lacked standing to sue Cell, and the judgment against him must be

reversed. Additionally, because Environmental should not have prevailed against Cell,

the award of attorney fees and costs to Environmental must also be reversed.

Reversed.