Lee D. Weiss, Weiss Capital Real Estate Group, LLC v. Private Capital, LLC

• Court: Court of Appeals of Minnesota
• Decided: August 25, 2014
• Docket: A13-2029
• Status: Unpublished

Opinion

This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2012).

STATE OF MINNESOTA IN COURT OF APPEALS A13-2029

Lee D. Weiss, Plaintiff,

Weiss Capital Real Estate Group, LLC, Respondent,

vs.

Private Capital, LLC, et al., Appellants.

Filed August 25, 2014 Reversed and remanded Peterson, Judge

Hennepin County District Court File No. 27-CV-10-20197

Michael Paris, Nystrom, Beckman & Paris LLP, Boston, Massachusetts; and

Eric R. Sherman, Vernle C. Durocher, Jr., Dorsey & Whitney, LLP, Minneapolis, Minnesota (for respondent)

Bruce G. Jones, Tyler A. Young, Faegre Baker Daniels LLP, Minneapolis, Minnesota (for appellants)

Considered and decided by Peterson, Presiding Judge; Schellhas, Judge; and

Connolly, Judge. UNPUBLISHED OPINION

PETERSON, Judge

In this appeal from the denial of their motion for judgment as a matter of law,

appellants argue that respondent’s conversion claim fails because it does not allege a tort

independent of the parties’ contract; in the absence of an independent tort, punitive

damages may not be awarded; and the evidence does not support the damages awarded

for breach of contract. We reverse and remand.

FACTS

Lee Weiss is a financial professional with more than 20 years of experience in the

financial-services industry. In June 2007, Weiss decided to invest in appellant Private

Capital, LLC, a real-estate-development company focused on properties in North

Carolina. Weiss formed respondent Weiss Capital Real Estate Group, LLC, for the

purpose of making the investment.

On June 28, 2007, Private Capital’s manager, appellant K. Scott Fischer, sent

Weiss an e-mail that states:

Attached is the Operating Agreement for Private Capital LLC and Schedule A reflecting the future ownership. . . . To confirm our conversation this morning, you will invest $500,000 into Private Capital LLC which will entitle you to 1) a 25% return on that capital until it is repaid, and 2) 18% of all profits on any Private Capital deals (other than Derbyshire, which has its own separate arrangement).

Weiss read the attached Private Capital operating agreement, signed it, and sent it back to

Fischer. The operating agreement states:

2 Without the consent of the Manager, no Member shall be entitled to a return of its Capital Contributions except by way of the distribution to it of assets upon the dissolution of the Company pursuant to the provisions of this Agreement. No interest shall be allocated to any Member on the amount of its Capital Account.

On August 23, 2007, Weiss Capital wired $250,000 to Fischer. Fischer allocated

$75,000 of that amount to Vein Mountain, LLC, a landholding company for which

Private Capital was the developer, and $175,000 to Private Capital. At Fischer’s request,

Weiss agreed to advance an additional $750,000 to Private Capital as a loan. On

September 17, 2007, Weiss Capital wired $1 million to Private Capital’s bank account

($250,000 to complete the $500,000 equity investment and $750,000 for the loan).

Fischer allocated $500,000 of that amount as an equity stake in Vein Mountain and

$500,000 as an equity stake in Camp Creek, another company for which Private Capital

was the developer. Weiss admitted that he signed Camp Creek’s operating agreement

and a conditional guarantee to permit Camp Creek to obtain a loan, but he testified that

he signed the documents in his capacity as a partner in Private Capital.

In October 2008, Weiss received partnership tax statements for Vein Mountain,

Camp Creek, and Private Capital. The tax statements showed that Weiss Capital had a

$175,000 equity interest in Private Capital, a $925,000 equity interest in Camp Creek,

and a $550,000 equity interest in Vein Mountain. Weiss testified that he was surprised to

receive the tax statements for Vein Mountain and Camp Creek because he never agreed

to invest in those companies. Weiss testified that he was shocked that the tax statement

for Private Capital showed only a $175,000 investment in that company. Weiss sent a

3 letter to Fischer stating that he disagreed with the allocation of profit, loss, capital, and

liability in the tax statements that he received.

Weiss and Weiss Capital brought this lawsuit against appellants alleging a breach-

of-contract claim against Private Capital and claims for unjust enrichment, conversion,

and fraud against Private Capital and Fischer. Weiss and Weiss Capital sought punitive

damages against both Private Capital and Fischer. The case was tried to a jury. The

district court granted appellants’ motion for a directed verdict on Weiss’s and Weiss

Capital’s claims that appellants fraudulently induced Weiss and Weiss Capital to invest in

Private Capital. The jury found Private Capital and Fischer liable to Weiss Capital for

conversion and awarded $500,000 in damages. The jury found that Private Capital

breached its contract with Weiss Capital and awarded $620,000 in damages. Before the

punitive-damages phase of trial, Weiss and Weiss Capital agreed that they would not

proceed with a punitive-damages claim against Private Capital. The jury awarded

$500,000 in punitive damages against Fischer.

Appellants moved for judgment as a matter of law (JMOL) on multiple grounds,

including that Weiss Capital was barred from seeking tort damages and there was no

evidence to support the damages award for the breach-of-contract claim. The district

court denied appellants’ motion and ordered judgment for Weiss Capital in the amount of

$620,000 against Private Capital for breach of contract, $500,000 against Private Capital

and Fischer on the conversion claim, and $500,000 against Fischer for punitive damages.

The district court awarded Weiss Capital $427,475 in attorney fees and $110,834 in costs

against Private Capital. Judgment was entered accordingly. This appeal followed.

4 DECISION

This court reviews the district court’s denial of JMOL de novo. Bahr v. Boise

Cascade Corp., 766 N.W.2d 910, 919 (Minn. 2009). JMOL should be granted:

only in those unequivocal cases where (1) in the light of the evidence as a whole, it would clearly be the duty of the [district] court to set aside a contrary verdict as being manifestly against the entire evidence, or where (2) it would be contrary to the law applicable to the case.

Jerry’s Enters., Inc., v. Larkin, Hoffman, Daly & Lindgren, Ltd., 711 N.W.2d 811, 816

(Minn. 2006) (quoting J.N. Sullivan & Assocs., Inc. v. F.D. Chapman Constr. Co., 304

Minn. 334, 336, 231 N.W.2d 87, 89 (1975)); see also Glorvigen v. Cirrus Design Corp.,

796 N.W.2d 541, 549 (Minn. App. 2011), aff’d 816 N.W.2d 572 (Minn. Jul. 18, 2012).

In denying appellants’ motion for JMOL, the district court rejected appellants’ arguments

that Weiss Capital was barred from seeking tort damages and that there was no evidence

to support the damages awarded for the breach-of-contract claim.

I.

A party may not recover tort damages for a breach of contract, “except in

exceptional cases where the defendant’s breach of contract constitutes or is accompanied

by an independent tort.” Wild v. Rarig, 302 Minn. 419, 440, 234 N.W.2d 775, 789

(1975) (citations omitted); see also Glorvigen v. Cirrus Design Corp., 816 N.W.2d 572,

584 (Minn. 2012) (stating that “[b]ecause of the differences between tort and contract

actions, ‘[w]hen a contract provides the only source of duties between the parties,

Minnesota law does not permit the breach of those duties to support a cause of action in

negligence.’” (quoting United States v. Johnson, 853 F.2d 619, 622 (8th Cir. 1988)).

5 “When the gravamen of the complaint is the breach of contract, the plaintiff may not

recover tort damages.” McNeill & Assocs., Inc. v. ITT Life Ins. Corp., 446 N.W.2d 181,

185 (Minn. App. 1989), review denied (Minn. Dec. 1, 1989). “The issue becomes

whether there is a breach of duty which is distinct from the breach of contract. . . . The

test is whether a relationship would exist which would give rise to the legal duty without

enforcement of the contract promise itself.” Hanks v. Hubbard Broad., Inc., 493 N.W.2d

302, 308 (Minn. App. 1992), review denied (Minn. Feb. 12, 1993). The existence of a

legal duty independent of the contract is a question of law, which is reviewed de novo.

Id. at 307.

“Conversion is the wrongful exercise of dominion or control over the property of

another.” Bates v. Armstrong, 603 N.W.2d 679, 682 (Minn. App. 2000), review denied

(Minn. Mar. 14, 2000). “Conversion may be established by proof of some act that

changes the character of the property or permanently deprives the owner of it.” Id.

Weiss Capital’s conversion claim is that appellants changed Weiss Capital’s

$500,000 equity investment in Private Capital into equity in other entities. 1 To recover

tort damages for this claim, Weiss Capital needed to show that changing the character of

its equity investment in Private Capital breached a duty that arose from a relationship

between Weiss Capital and Private Capital, rather than from a contractual duty.

The district court concluded that, because changing the character of Weiss

Capital’s investment was a separate wrong independent of Private Capital’s contractual

1 The allegation in the second amended complaint is that “without Weiss’ knowledge or consent, the defendants took $325,000 of Weiss’ $500,000 capital investment in Private Capital and converted it into a capital investment in Camp Creek.”

6 duty to pay Weiss Capital interest on its investment, 2 Weiss Capital’s conversion claim

was not barred. But the fact that changing the character of Weiss Capital’s investment

and failing to pay interest on the investment were separate, independent wrongs does not

mean that changing the character of the investment breached a duty that was independent

of the parties’ contract.

Weiss Capital has not identified any duty independent of the parties’ contract that

was breached by changing the character of its equity investment in Private Capital.

Section 6.2(a) of the operating agreement states that “[a] separate Capital Account shall

be maintained for each Member. Each Member’s Capital Account shall be (a) credited

with (i) the amount of money contributed by such Member . . . and (b) debited with

(i) the amount of money distributed to such Member.” Under this provision, appellants

had a duty to credit Weiss Capital’s capital account with $500,000, which was the

amount of money that Weiss Capital contributed to Private Capital. This duty was

separate from any duty to pay interest on the investment, but both duties arose from the

contractual relationship created by the operating agreement, not from some other

relationship.

Weiss Capital argues that appellants breached an independent legal duty to not

interfere with the property rights of another.3 But the specific property right that Weiss

2 We will address below whether Private Capital had a contractual duty to pay Weiss Capital interest. 3 Citing Fawcett v. Heimbach, 591 N.W.2d 516, 518-19 (Minn. App. 1999), Weiss Capital argues that pledging or disposing of another’s equity in a company is conversion, even when the parties’ relationship is governed by a contract. But in Fawcett, this court did not address whether the conversion was an independent tort distinct from any breach

7 Capital claims that appellants interfered with is Weiss Capital’s right to have its $500,000

allocated as a capital investment in Private Capital. This right does not exist

independently from the operating agreement, and the gravamen of the conversion claim is

that Private Capital did not allocate Weiss Capital’s money as required under the

operating agreement, which is a breach-of-contract claim.

Weiss Capital may not recover tort damages by claiming that appellants interfered

with its property rights and simply ignore that the operating agreement is the source of

those rights. The test set forth in Hanks is that there must be a “legal duty without

enforcement of the contract promise itself.” 493 N.W.2d at 308. The only basis in the

record for concluding that appellants interfered with Weiss Capital’s property rights by

allocating part of the $500,000 to equity in entities other than Private Capital is that

appellants had a contractual duty under the operating agreement to allocate the $500,000

only to equity in Private Capital. Consequently, the duty to not interfere with the

property rights of another cannot be enforced without also enforcing the contractual duty.

We, therefore, reverse the denial of appellants’ motion for JMOL on respondent’s

conversion claim and remand for entry of judgment in appellants’ favor on that claim.

II.

Even if a contract is breached maliciously, punitive damages will not lie unless the

maliciousness constitutes an independent tort. Barr/Nelson, Inc. v. Tonto’s, Inc., 336

N.W.2d 46, 52-53 (Minn. 1983). Because Private Capital’s failure to allocate Weiss

of contract; the principal issue was the measure of damages for the conversion. Fawcett does not support Weiss Capital’s argument.

8 Capital’s $500,000 as a capital investment in Private Capital does not constitute an

independent tort, it will not support an award of punitive damages. We, therefore,

reverse the denial of Fischer’s motion for JMOL on respondent’s claim for punitive

damages and remand for entry of judgment in Fischer’s favor on that claim.

III.

Private Capital argues that the jury’s $620,000 damages award on Weiss Capital’s

contract claim should be reversed because no evidence supports the award. “In a breach

of contract action, [the plaintiff] has the burden of proving not only breach, but that

damages arose from the breach.” D.H. Blattner & Sons, Inc., v. Firemen’s Ins. Co. of

Newark, New Jersey, 535 N.W.2d 671, 675 (Minn. App. 1995), review denied (Minn.

Oct. 18, 1995). “The law does not require mathematical precision in proof of loss, but

only proof to a ‘reasonable, although not necessarily absolute, certainty.’” Leoni v.

Bemis Co., 255 N.W.2d 824, 826, (Minn. 1977) (quoting N. Petrochemical Co. v.

Thorsen & Thorshov, Inc., 297 Minn. 118, 125, 211 N.W.2d 159, 166 (1973)).

Weiss Capital claimed that Private Capital breached the parties’ contract when it

allocated as a capital investment in Private Capital only $175,000 of the $500,000 wired

to Private Capital and allocated the remaining $325,000 as an equity investment in

another entity. Private Capital contends that, because it is undisputed that Weiss Capital

owns an 18 percent interest in Private Capital, the only thing that would have been

different if this breach had not occurred is that Weiss Capital would have $500,000,

rather than $175,000, allocated to its Private Capital capital account. Private Capital

argues that because Weiss Capital presented no evidence that would have permitted the

9 jury to calculate the pecuniary value of the difference between having $175,000 allocated

to its capital account and having $500,000 allocated to its capital account, the damages

award for breach of contract has no evidentiary basis in the record.

The district court rejected Private Capital’s argument that Weiss Capital needed to

present evidence of the loss caused by misallocating Weiss Capital’s $500,000 because it

reasoned that “[t]he jury’s verdict instead appears to be based on Exhibit 13. That exhibit

promised Weiss Capital 25% interest on $500,000, and $620,000 represents almost

exactly 25% interest between the time Weiss Capital deposited $500,000 and when this

suit occurred.”

Exhibit 13 is a June 28, 2007, email from Fischer to Weiss, which states:

Thanks for your time on behalf of Private Capital LLC. Attached is the Operating Agreement for Private Capital LLC and Schedule A reflecting the future ownership. . . . To confirm our conversation this morning, you will invest $500,000 into Private Capital LLC which will entitle you to 1) a 25% return on that capital until it is repaid, and 2) 18% of all profits on any Private Capital deals (other than Derbyshire, which has its own separate arrangement). Please contact me with any questions.

The district court determined that the Private Capital operating agreement gave Fischer

the right to make investment decisions and agreements, “which the jury could have found

included the promise made in Exhibit 13.”

But construction of an unambiguous contract presents a question of law; a fact-

finder determines the terms of an ambiguous contract, but no such determination is

necessary for an unambiguous contract, such as Exhibit 13 and the Private Capital

operating agreement. Denelsbeck v. Wells Fargo & Co., 666 N.W.2d 339, 346 (Minn.

10 2003). The district court’s speculation about the jury’s interpretation of the contract

terms is, therefore, misplaced.

Fischer’s email in Exhibit 13 does not promise to pay Weiss Capital interest on its

capital at the rate of 25%, as the district court found; it promises “a 25% return on that

capital until it is repaid.” The difference between “25% interest” and “a 25% return” is

explained by the provisions of the operating agreement attached to the email, which states

that “[n]o interest shall be allocated to any Member on the amount of its Capital

Account.”

The operating agreement defines several terms, as follows:

“‘Capital Contribution’ shall mean any contribution to the capital of the Company in accordance with Section 6.1 hereof.”

“‘Unreturned Capital’ means, with respect to a Membership Interest, the Capital Contribution made in exchange for or on account of such Membership Interest, reduced by all distributions made by the Company that constitute a return of the Capital Contribution therefor.”

“‘Return’ means, with respect to a Membership Interest, an amount accruing each day, like interest, on the then- outstanding Unreturned Capital with respect to such Membership Interest, at the rate of 25% per annum, compounded annually.”

“‘Unpaid Return’ means as of any date, an amount equal to the excess, if any of (a) the aggregate Return accrued on all Membership Interests from the date of issuance through such date, over (b) the aggregate amount of prior distributions made by the Company in respect of accrued Return with respect to all such Membership Interests pursuant to Section 6.4.

11 Applying these definitions, Weiss Capital’s “Capital Contribution” to Private

Capital was $500,000. Until Weiss Capital receives a distribution from Private Capital

that constitutes a return of its “Capital Contribution,” its “Unreturned Capital” is

$500,000. And until Weiss Capital’s “Unreturned Capital” is reduced to zero, a “Return”

amount will accrue each day on the outstanding balance of its “Unreturned Capital” at the

rate of 25% per annum.

But this does not mean that Weiss Capital is entitled to receive interest of 25% per

year on its $500,000 investment. Instead, the accrued “Return” becomes “Unpaid

Return” until it is paid off by a distribution made pursuant to section 6.4 of the operating

agreement.

Section 6.4(a) states:

Distributions of Operating Proceeds, Capital Proceeds and any other assets (with the fair market value of any assets other than cash determined in good faith by the Manager) shall be made to the Members as follows, at such time or times as the Manager shall determine in its sole discretion:

(i) First, one-hundred percent (100%) to the Members, pro rata in respect of their Membership Interests, until the aggregate Unreturned Capital in respect of the Membership Interests equals zero;

(ii) Second, one-hundred percent (100%) to the Members, pro rata in respect of their Membership Interests, until the aggregate Unpaid Return in respect of the Membership Interests equals zero;

(iii) Thereafter, to the Members pro rata.

Thus, whether to make a distribution is solely within the discretion of the

manager, and, if the manager decides to make a distribution, the amount distributed is

12 used first to reduce each member’s aggregate unreturned capital to zero and then to

reduce each member’s unpaid return to zero. Applying these principles to Weiss

Capital’s $500,000 means that, if Fischer decides to make a distribution, the amount

distributed will be used first to return to Weiss Capital its $500,000 and then to pay

Weiss Capital whatever return has accrued on its unreturned capital at the rate of 25% per

annum.

The accruing amount is not a sum that the company is required to pay to a member

as if it were interest. Instead, it is an amount to be paid under section 6.4 if the manager

decides to make a distribution. This means that Private Capital did not have a contractual

obligation to pay Weiss Capital interest on its $500,000. Weiss Capital may become

entitled to receive a 25% return on its investment if Private Capital is successful and the

manager decides to make a large enough distribution, but the evidence does not

demonstrate that it is entitled to receive 25% interest on its $500,000. We, therefore,

reverse the denial of appellants’ motion for JMOL on respondent’s breach-of-contract

claim and remand for entry of judgment in Private Capital’s favor on that claim.

IV.

Attorney fees were awarded under the operating agreement, which states:

Notwithstanding anything to the contrary in this Agreement, in the case of any dispute between the Company and any Member or Members, or between or among Members, regarding enforcement or interpretation of this Agreement, or any suit by the Company against any Member, or by any Member against the Company or any other Member, to enforce or interpret this Agreement, the substantially prevailing party in such dispute or suit shall be reimbursed by the other party or parties for the substantially

13 prevailing party’s reasonable costs and expenses incurred in such dispute or action (including, without limitation, court costs and reasonable attorney’s, expert witness’, accountant, and other professional fees and expenses).

Because we have reversed the denial of appellants’ motion for JMOL on

respondent’s claims for conversion, punitive damages, and breach of contract, we reverse

the awards of costs and attorney fees and remand to permit the district court to award

costs and attorney fees to the substantially prevailing party.

Reversed and remanded.