Sacramento E.D.M., Inc. v. Hynes Aviation Industries, Inc

• Court: Court of Appeals for the Ninth Circuit
• Decided: January 29, 2019
• Docket: 17-16041
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS JAN 29 2019 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

SACRAMENTO E.D.M., INC.; DAN No. 17-16041 FOLK, D.C. No. 2:13-cv-00288-KJN Plaintiffs-Appellees,

v. MEMORANDUM*

HYNES AVIATION INDUSTRIES, INC., DBA Hynes Aviation Services; HYNES CHILDREN TF LIMITED; MICHAEL K. HYNES,

Defendants-Appellants.

SACRAMENTO E.D.M., INC.; DAN No. 17-16219 FOLK,

Plaintiffs-Appellants, D.C. No. 2:13-cv-00288-KJN

v.

HYNES AVIATION INDUSTRIES, INC., DBA Hynes Aviation Services; HYNES CHILDREN TF LIMITED; MICHAEL K. HYNES,

Defendants-Appellees.

Appeals from the United States District Court

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. for the Eastern District of California Kendall J. Newman, Magistrate Judge, Presiding

Argued and Submitted October 9, 2018 San Francisco, California

Before: TASHIMA and MURGUIA, Circuit Judges, and HINKLE,** District Judge.

This case arises out of a complicated, multi-year business relationship

between plaintiffs and defendants. Sacramento E.D.M., Inc. (“SacEDM”), a

specialized manufacturing company, began to experience financial trouble.

SacEDM’s owner, Dan Folk, formed a relationship with Dr. Michael Hynes, an

aviation and business expert. Initially, Hynes worked as a financial consultant for

Folk and SacEDM. Shortly thereafter, the parties formed a company called

“Oklahoma E.D.M.” (“OK EDM”) that existed solely to loan money to SacEDM

for operating expenses and buy SacEDM’s production. Through this joint venture,

Hynes and his two companies, Hynes Aviation Industries, Inc. (“HAI”) and Hynes

Children TF Limited (“Hynes Children”), (1) loaned SacEDM money for operating

expenses, (2) purchased SacEDM’s operating equipment and leased it back to

SacEDM, (3) purchased a bank-owned judgment against SacEDM, and (4)

purchased key man life insurance policies for both Hynes and Folk. These deals

** The Honorable Robert L. Hinkle, United States District Judge for the Northern District of Florida, sitting by designation.

2 were designed to generate cash flow for SacEDM, helping it to continue

operations. These deals also had tax benefits for the parties and generated interest

for Hynes and his companies. Throughout this time, Hynes either directly acted as

a financial consultant to Folk and SacEDM or was considered a fiduciary with

regard to Folk and SacEDM by virtue of their partnership in OK EDM.

Despite the parties’ efforts, after several years, SacEDM was still failing as a

business. The relationship between Folk and Hynes soured, and the parties sued

each other. SacEDM and Folk (“plaintiffs”) sued Hynes and his companies in

Sacramento Superior Court under a variety of state law tort and contract theories,

including constructive fraud and breach of fiduciary duty. Hynes, HAI, and Hynes

Children (“defendants”) sued Folk and SacEDM in the Western District of

Missouri for breach of the loan and lease agreements.

The two cases were consolidated in the Eastern District of California before

Magistrate Judge Kendall J. Newman. Following a seven-day bench trial, the court

issued its findings of fact and conclusions of law, resolving all claims and

counterclaims. Both parties appealed.

We review the district court’s findings of fact following a bench trial for

clear error. See Kohler v. Presidio Int’l, Inc., 782 F.3d 1064, 1068 (9th Cir. 2015)

(citation omitted). “This standard is significantly deferential, and [the reviewing

court] will accept the lower court’s findings of fact unless [it is] left with the

3 definite and firm conviction that a mistake has been committed.” Lentini v. Cal.

Ctr. for the Arts, Escondido, 370 F.3d 837, 843 (9th Cir. 2004) (citation omitted).

We review “de novo whether the district court used the correct legal

standard in computing damages.” United States v. Pend Oreille Cty. Pub. Util.

Dist. No. 1, 135 F.3d 602, 608 (9th Cir. 1998). We review the district court’s

computation of damages following a bench trial for clear error. Lentini, 370 F.3d at

843.

We have jurisdiction under 28 U.S.C. § 1291. For the reasons that follow,

we affirm in part and reverse in part:

1. “We review de novo the question of when a cause of action accrues

and whether a claim is barred by the statute of limitations.” Oja v. U.S. Army

Corps of Eng’rs, 440 F.3d 1122, 1127 (9th Cir. 2006). However, where accrual

turns on a question of fact or a mixed question of law and fact, such as what the

plaintiff knew or what a reasonable person should have known, we review for clear

error. Id. at 1135; see also Kingman Reef Atoll Invs., L.L.C. v. United States, 541

F.3d 1189, 1195 (9th Cir. 2008) (“When the accrual of the statute of limitations in

part turns on what a reasonable person should have known, we review this mixed

question of law and fact for clear error.”) (citation and internal quotation marks

omitted). Under this standard, we conclude that the district court did not err in

finding that plaintiffs’ claims for constructive fraud and breach of fiduciary duty

4 were not barred by the statute of limitations. We affirm the district court’s

conclusion that a continuing violation exists, and therefore plaintiffs’ claims are

timely under §§ 338 and 343 of the California Code of Civil Procedure.

2. We affirm in part and reverse in part the district court’s findings and

conclusions regarding the equipment leases. We affirm the district court’s findings

that provisions of the leases—namely the interest rate and the lease periods—

worked to the detriment of SacEDM and the benefit of defendants, giving rise to a

breach of Hynes’s fiduciary duty and constructive fraud. We affirm the district

court’s finding that Hynes misrepresented the interest rate and duration of the

equipment leases. Moreover, the district court did not err in finding the equipment

leases were unconscionable. However, HAI was a lessor; it was not a lessee, and

therefore the lease’s no-assignment clause was not at issue. For this reason, we

affirm in part and reverse in part the district court’s findings with regard to the

equipment leases. We remand with instructions that the district court find that HAI

was a lessor, and determine damages accordingly.

3. The district court did not err in denying attorneys’ fees under the

equipment leases. Med. Protective Co. v. Pang, 740 F.3d 1279, 1282 (9th Cir.

2013). The leases did not contain a general attorneys’ fees provision; rather, the

leases contained three references to attorneys’ fees that are not applicable here.

DocMagic, Inc. v. Mortg. P’ship of Am., 729 F.3d 808, 812 (8th Cir. 2013) (stating

5 that Missouri law requires courts to enforce binding attorneys fees provisions if a

contract so provides).

4. The district court did not err in concluding that Hynes breached his

fiduciary duty with regard to the US Banc Judgment; however, the court erred in

calculating damages. First, the district court thoroughly considered the evidence

regarding how Folk and SacEDM came to be responsible for paying the US Banc

Judgment. We find no clear error with the district court’s factual findings:

specifically, Hynes purchased the US Banc Judgment for $50,000 and then induced

Folk and SacEDM to repay the full amount of the judgment rather than the

purchase price. Lentini, 370 F.3d at 843. However, the court should have awarded

$223,000 rather than $251,000 based on the evidence presented regarding Joint

Exhibit 84. Therefore, we reverse and remand with instructions for the court to

award $223,000 with regard to the US Bank Judgment. Id.

5. We affirm the district court’s conclusion that the OK EDM business

structure provided significant business advantages to SacEDM such that Hynes did

not breach his fiduciary duties with regard to the creation of OK EDM or the

associated operating loans. Tribeca Cos., LLC v. First Am. Title Ins. Co., 192 Cal.

Rptr. 3d 354, 375 (Cal. Ct. App. 2015). Plaintiffs are therefore required to pay the

outstanding amount of principal and interest on the operating loans. We find that

the interest calculated by the district court is not usurious because it is less than the

6 maximum interest rate allowed under California law. See Cal. Const. art. XV, §

1(2); see also Sheehy v. Franchise Tax Bd., 100 Cal. Rptr. 2d 760, 762 (Cal. Ct.

App. 2000).

6. The district court did not err in concluding that Folk was not jointly

liable for repayment of the operating loans and equipment leases. First, the district

court did not clearly err in finding that HAI and SacEDM withdrew from their

business relationship via a signed writing, thereby removing Folk’s liability under

a partnership theory. Filippo Indus., Inc. v. Sun Ins. Co. of N.Y., 88 Cal. Rptr. 2d

881 (Cal. App. 1999), as modified (Oct. 20, 1999) (“Whether a partnership or joint

venture exists is primarily a factual question to be determined by the trier of fact

from the evidence and inferences to be drawn therefrom.”). Second, we affirm the

district court’s conclusion that SacEDM was not an alter ego of Folk. Firstmark

Capital Corp. v. Hempel Fin. Corp., 859 F.2d 92, 94 (9th Cir. 1988). Finally, we

affirm the district court’s finding that SacEDM, not Folk, is liable under the

equipment leases.

7. The district court did not clearly err in finding that Hynes may retain

his consulting fees. See Lentini, 370 F.3d at 843.

8. We affirm the district court’s decision ordering SacEDM to pay the

remaining balance on the key man life insurance policies. The district court did

not clearly err in finding that the parties contracted for this arrangement. Id.

7 Moreover, plaintiffs’ forfeiture argument—that plaintiffs are ordered to pay for

both the life insurance premiums and the outstanding balance of the operating

loans—is not borne out by record. As it stands now, proceeds from the life

insurance policy might still be used to pay the balance of the operating loans.

AFFIRM in part, REVERSE and REMAND in part. Each party shall

bear its own costs.