Transfer My Timeshares v Selway

2009 DNH 153

• Court: District Court, D. New Hampshire
• Decided: October 9, 2009
• Docket: CV-08-118-JL
• Status: Published

Opinion

Transfer My Timeshares v Selway CV-08-118-JL 10/9/09

UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

Transfer My Timeshare, LLC

v. Civil N o . 08-cv-118-JL Opinion N o . 2009 DNH 153 Laura Selway

MEMORANDUM ORDER

Plaintiff Transfer My Timeshare, LLC (“TMT”), a provider of

escrow services for timeshare sales and rentals, filed this suit

against the defendant Laura Selway, formerly one of its managing

members, alleging that she embezzled client escrow funds and

engaged in other fraudulent conduct. The parties have reached a

confidential settlement resolving all of the issues in the case,

save one: whether Selway has a right to setoff or recoupment of

the unpaid portion of a buyout agreement that the parties

executed shortly before TMT learned of her alleged embezzlement.

TMT has moved for partial summary judgment on that issue, see

Fed. R. Civ. P. 5 6 , arguing that Selway has no right to setoff or

recoupment because she fraudulently induced the buyout agreement

and then breached its terms. The summary judgment objection

deadline has long since passed, with no response or request for

relief from Selway.1

1 Selway informed the court earlier in the case that she was under investigation by the FBI regarding the alleged embezzlement. To the extent that any such investigation may have extended past the summary judgment objection deadline, a request This court has jurisdiction under 28 U.S.C. § 1331 (federal

question), 18 U.S.C. § 1964 (civil RICO), and 28 U.S.C. § 1367

(supplemental jurisdiction). TMT’s motion is granted. The

summary judgment record establishes that Selway has no right to

setoff or recoupment under the buyout agreement, which she

fraudulently induced, and any such award would be inequitable

under the doctrine of unclean hands.

I. Applicable legal standard

Summary judgment is appropriate where “the pleadings, the

discovery and disclosure materials on file, and any affidavits

show that there is no genuine issue as to any material fact and

that the movant is entitled to a judgment as a matter of law.”

Fed. R. Civ. P. 56(c). In making this determination, the “court

must scrutinize the record in the light most flattering to the

party opposing the motion, indulging all reasonable inferences in

that party’s favor.” Mulvihill v . Top-Flite Golf Co., 335 F.3d

1 5 , 19 (1st Cir. 2003).

Where, as here, the nonmoving party files no response to the

summary judgment motion, “[a]ll properly supported material facts

in the moving party’s factual statement shall be deemed

admitted,” since they were not “properly opposed.” L.R.

7.2(b)(2); see also De Jesus v . LTT Card Svcs., Inc., 474 F.3d

1 6 , 20 (1st Cir. 2007). Summary judgment does not, however,

for a stay or similar relief would not have been unexpected. Regardless, she has made no such request. “automatically follow.” Stonkus v . City of Brockton School

Dep’t, 322 F.3d 9 7 , 102 (1st Cir. 2003). The court still must

evaluate whether the moving party’s submission meets the summary

judgment standard. See Fed. R. Civ. P. 56(e) (“If the adverse

party does not ... respond, summary judgment, if appropriate,

shall be entered against the adverse party.”) (emphasis added).

Consistent with this approach, the following background

summary is based on TMT’s statement of material facts as set

forth in its summary judgment motion, which is supported by

affidavits from its chief operating officer and senior financial

analyst. The chief operating officer’s affidavit incorporates by

reference TMT’s verified complaint, which the court also has

considered. See Sheinkopf v . Stone, 927 F.2d 1259, 1262 (1st

Cir. 1991) (stating that a verified complaint “ought to be

treated as the functional equivalent of an affidavit to the

extent that it satisfies the standards explicated in Rule

56(e)”).

II. Background

In January 2006, Selway became one of the managing members

of TMT, a limited liability company that provided escrow services

for timeshare sales and rentals. In that capacity, she was

responsible for managing client funds paid into TMT’s escrow

accounts at Bank of America. The other managing members regarded

her as an honest and dedicated colleague. Two years into the job, however, problems arose. The other

managing members determined that TMT had been losing money for

more than a year, that Selway had delayed the closings of several

pending transactions, and that she could not accurately account

for escrow funds relating to those transactions. While not then

aware of any embezzlement or fraud, the other managers met with

Selway on January 1 1 , 2008, explained that her performance was

unacceptable, and arranged a buyout of her 31-percent membership

interest in TMT for a total of $100,000 (payable in monthly

installments over the next year), which they understood to be its

fair value at the time.

Selway and TMT executed a formal buyout agreement on

February 4 , 2008. Selway warranted in the agreement that she had

“no other equity, ownership, economic or other interest, directly

or indirectly, in [TMT], its affiliates or any of their

respective assets,” other than the 31-percent membership interest

being transferred. She also agreed to deliver to TMT an

“acceptable” non-disclosure and non-competition agreement

(“NDA”). The buyout agreement contained an express condition

that Selway’s “[f]ailure to comply” with the NDA “shall terminate

[TMT’s] obligations to make payments to [Selway] hereunder.”

Unknown to TMT, when Selway signed the buyout agreement, she

had already embezzled or otherwise diverted $380,000 in cash and

contract rights from TMT to herself or to a competing entity that

she established, called Reliable Timeshare Closing Services. At some point in late 2007 or early 2008, Selway had opened two

accounts at Planters Bank under her own name, “doing business as”

TMT. Checks attached to TMT’s verified complaint show that as

early as January 2008, before the buyout agreement was signed,

Selway was depositing client escrow funds into her unauthorized

Planters Bank accounts rather than TMT’s authorized Bank of

America accounts.

TMT first learned of this unauthorized activity in March

2008, about a month after the buyout agreement was signed and

after having made two installment payments to Selway pursuant to

the agreement. Had TMT been aware of the nature and extent of

Selway’s misconduct, it maintains that it never would have signed

the agreement in the first place. Further investigation by TMT,

including an audit of its escrow accounts, has revealed that

Selway’s actions cost the company more than $500,000 and affected

more than 200 client transactions.

TMT filed this suit against Selway in March 2008, alleging

conversion (embezzlement), breach of fiduciary duty, tortious

interference with contract, constructive trust, fraud, unfair

competition, and a civil RICO claim. In her answer, Selway

admitted to having operated Reliable Timeshare Closing Services

“for a short period of time,” but otherwise denied TMT’s

allegations or invoked her constitutional right against self-

incrimination in light of a parallel criminal investigation. See

note 1 , supra. Selway also raised a number of affirmative defenses, including that TMT’s “claims are barred in whole or in

part based on Defendants’ right to setoff, recoupment and

counterclaim” under the buyout agreement.

The parties notified the court that they had reached a

confidential settlement of all issues in the case except for the

validity of Selway’s affirmative defense for setoff and

recoupment. TMT simultaneously filed a motion for partial

summary judgment on that issue. Selway has not filed any

response to the motion, nor has she provided any additional

explanation or support for her affirmative defense, aside from

the mere assertion of it in her answer.

III. Analysis

The only question remaining in this case is whether Selway

has a right to setoff or recoupment equal to the unpaid portion

of the buyout agreement that the parties executed shortly before

TMT learned of Selway’s alleged embezzlement. Because the buyout

agreement contains a valid Florida choice-of-law provision, which

TMT regards as controlling and which Selway has not challenged,

the court will apply Florida law in resolving this question. See

In re Calore Express Co., 288 F.3d 2 2 , 43 (1st Cir. 2002) (noting

that setoff is ordinarily a question of state l a w ) . The burden

of proving setoff and recoupment falls “upon the defendant who

presents them” as affirmative defenses. Jacksonville Paper C o .

v . Smith & Winchester Mfg. Co., 2 S o . 2d 8 9 0 , 893 (Fla. 1941). As an initial matter, the court notes that Selway’s

affirmative defense is properly understood as one for recoupment,

not setoff. Both defenses involve the equitable reduction of

damage awards, but in slightly different situations. Recoupment

is a defense “analogous to a compulsory counterclaim, in that

both ‘spring’ from the same transaction as the plaintiff’s cause

of action,” whereas “set-off is an affirmative defense arising

out of a transaction extrinsic to a plaintiff’s cause of action,”

making it more analogous to a permissive counterclaim. Kellogg

v . Fowler, White, Burnett, Hurley, Banick & Strickroot, P.A., 807

S o . 2d 669, 670 n.2 (Fla. Dist. C t . App. 2001) (citing Metro.

Cas. Ins. C o . of N.Y. v . Walker, 9 S o . 2d 3 6 1 , 362 (Fla. 1942))

(emphases added); see also United Structures of Am., Inc. v .

G.R.G. Eng’g, S.E., 9 F.3d 996, 998 (1st Cir. 1993) (explaining

this traditional distinction and noting that modern pleading

rules have diminished its importance). Here, Selway’s

affirmative defense clearly arises from the same transaction as

TMT’s claims against her and thus is technically one for recoupment.2

The doctrine of recoupment, as applied in Florida, is easy

2 As to the other item listed in Selway’s affirmative defense -- i.e., “counterclaim” -- Florida law regards it merely as “the equivalent of a set-off and a recoupment combined.” Peacock Hotel, Inc. v . Shipman, 138 S o . 4 4 , 47 (Fla. 1931). A defendant must use one or the other, because counterclaim is not a separate, stand-alone doctrine. See Delco Light C o . v . John Le Roy Hutchinson Props., 128 S o . 8 3 1 , 835 (Fla. 1930) (Brown, J., concurring specially). enough to understand. “[R]ecoupment is the keeping back of

something that is due because there is an equitable reason for

holding it.” Beach v . Great W . Bank, 692 S o . 2d 146, 153 (Fla.

1997) (quoting Williams v . Neely, 134 F. 1 , 5 (8th Cir. 1904)).

More specifically, recoupment allows a defendant faced with a

claim for damages to recoup her own damages resulting from the

same underlying transaction with the plaintiff, thereby reducing

the size of the plaintiff’s damages award. See Marianna Lime

Prods. C o . v . McKay, 147 S o . 2 6 4 , 266 (Fla. 1933) (citing Payne

v . Nicholson, 131 S o . 3 2 4 , 326 (Fla. 1930)).

As a doctrine rooted in equity, see Branch v . Wilson, 12

Fla. 543 (1868), recoupment must be applied in accordance with

traditional equitable principles. See, e.g., Davis v . Starling,

799 S o . 2d 373, 377-78 (Fla. Dist. C t . App. 2001). One such

principle is that of unclean hands. See, e.g., Minskoff v . U.S.,

349 F. Supp. 1146, 1150 (S.D.N.Y. 1972) (stating that “recoupment

being in the nature of an equitable defense, it cannot be invoked

by a party who lacks ‘clean hands’”). “It is a fundamental

principle of equity,” in Florida and elsewhere, “that no one

shall be permitted to profit from his own fraud or wrongdoing,

and that one who seeks the aid of equity must do so with clean

hands.” Yost v . Rieve Enters., Inc., 461 S o . 2d 1 7 8 , 184 (Fla.

Dist. C t . App. 1984) (citing Hauer v . Thum, 67 S o . 2d 643, 645

(Fla. 1953)). Under this principle, “[u]nscrupulous practices,

overreaching, concealment, trickery or other unconscientious conduct are sufficient to bar relief.” Hensel v . Aurilio, 417

S o . 2d 1035, 1038 (Fla. Dist. C t . App. 1982) (quoting 22 Fla.

Jur. 2d, Equity, § 5 0 ) . Whether to apply the principle of

unclean hands in any given case “rests in the sound discretion of

the court.” Roberts v . Roberts, 84 S o . 2d 7 1 7 , 720 (Fla. 1950).

Here, Selway presents her recoupment defense to this court

with unclean hands.3 She seeks the benefit of a buyout agreement

that -- according to the uncontested facts submitted by TMT, see

Part I , supra -- she executed while already in the process of

secretly diverting client escrow funds from, and thereby eroding

the value o f , the very company from which she was being “bought

out.” As of the date of the agreement, she had diverted more

than $380,000. Allowing Selway to recoup the inflated price of

her membership interest would essentially reward her for

concealing this misconduct, thereby effecting a windfall and

unjustly enriching her. See, e.g., Westinghouse Credit Corp. v .

D’Urso, 278 F.3d 1 3 8 , 148 (2d Cir. 2002) (denying recoupment

where it would “give [Seller] a windfall and unjustly enrich

[her] at the expense of” the plaintiff) (quoting In re Peterson

Distrib., Inc., 82 F.3d 956, 963 (10th Cir. 1996)).

3 The court notes that TMT did not expressly cite the principle of unclean hands in its summary judgment motion, focusing instead on showing that Selway’s conduct satisfied the elements of fraudulent inducement (discussed infra). Nevertheless, the principle of unclean hands may be raised sua sponte by the court, so long as the record supports i t . Dale v Jennings, 107 S o . 175, 180 (Fla. 1926); Gray v . Purchase Corp., 573 S o . 2d 205, 206 (Fla. Dist. C t . App. 1991). While the unclean hands doctrine does not require proof of

actionable fraud, see Dale, 107 S o . at 1 8 0 , TMT has shown --

again, with uncontested facts -- that Selway’s conduct indeed

rose to that level. Fraudulent inducement has four elements: (1)

a misrepresentation of a material fact; (2) that the maker knew

or should have known was false; (3) that the maker intended to

induce another’s reliance; and (4) that induced justifiable

reliance by the other party. Output, Inc. v . Danka Bus. Sys.,

Inc., 991 S o . 2d 9 4 1 , 944 (Fla. Dist. C t . App. 2008). Here,

Selway expressly represented that she did not have any interest

in TMT or its assets, other than the 31-percent membership

interest being transferred by the agreement.4 In reality,

however, she had undisclosed bank accounts in which she had

deposited large sums of money from TMT’s clients. She either

knew or should have known that her representation was false.

Given the timing of the agreement and the scope of her misconduct

as set forth in TMT’s summary judgment motion, the only

reasonable inference is that Selway intended to induce TMT’s

reliance. See, e.g., Meuser v . Fed. Express Corp., 564 F.3d 5 0 7 ,

515 (1st Cir. 2009) (“Even in cases where elusive concepts such

4 Even setting aside the express representation, Selway failed to disclose to TMT that she had been diverting large sums from the company. Under Florida law, fraudulent inducement can also be based on a knowing omission. See, e.g., Output, Inc., 991 S o . 2d at 944 (“[W]hen the fraud occurs in the connection with ... omissions which cause the complaining party to enter into a transaction, then such fraud is fraud in the inducement”) (quotation omitted). as motive or intent are at issue, summary judgment may be

appropriate if the nonmoving party rests merely upon conclusory

allegations, improbable inferences, and unsupported

speculation.”) (quotation omitted) (emphasis added). And TMT

justifiably relied on Selway’s representation to its detriment,

agreeing to pay an inflated price for her membership interest.

Thus, TMT has shown that Selway fraudulently induced the

agreement.

Under Florida law, “[w]here there is fraudulent inducement

of a contract, the fraudulent misrepresentation vitiates every

part of the contract.” D&M Jupiter, Inc. v . Friedopfer, 853 S o .

2d 485, 489 (Fla. Dist. C t . App. 2003) (citing Oceanic Villas

Inc. v . Godson, 4 S o . 2d 689, 690 (Fla. 1941)). Like most

states, Florida regards a fraudulently induced contract as

voidable at the defrauded party’s option. See Mazzoni Farms,

Inc. v . E.I. DuPont de Nemours & Co., 761 S o . 2d 306, 313 (Fla.

2000) (noting that the defrauded party can either rescind the

contract or ratify it and sue for damages). Because TMT has a

right to void the buyout agreement, Selway would be unable to

obtain a contract recovery from TMT at law.5

5 TMT also argues that Selway would be unable to enforce the buyout agreement because she materially breached it by operating a competing business after it was signed. This argument, however, lacks a sufficient factual foundation to support summary judgment. It is true, as TMT notes, that the buyout agreement made the $100,000 payment to Selway expressly contingent upon her compliance with an “acceptable” non-disclosure and non- competition agreement. It is also true that Selway has admitted to operating a competing business for a short period of time. This court thus concludes that Selway has no right to

recoupment under the buyout agreement, which she fraudulently

induced, and that any such award would be inequitable under the

doctrine of unclean hands. Although in most cases “[w]hether

recoupment would be equitable depends on the facts proved at

trial,” Davis, 799 S o . 2d at 3 7 7 , this court cannot conceive of

any scenario in which recoupment would be awarded to Selway in

this case, in light of the uncontested facts set forth in TMT’s

summary judgment motion. See, e.g., Meuser, 564 F.3d at 515

(explaining that a “genuine issue” exists under Rule 56(c) only

when a reasonable fact-finder could resolve the point in favor of

the nonmoving party). The purpose of recoupment is to ensure

that “full and complete justice can be done in a single suit,”

Payne, 131 S o . at 326, and giving Selway the benefit of the

buyout agreement in this case would be manifestly unjust.

Summary judgment is therefore appropriate.

IV. Conclusion

The plaintiff’s motion for partial summary judgment6 is

GRANTED. Since the parties have reached a confidential

But TMT has not “connected the dots” by establishing that Selway’s conduct violated the NDA. Indeed, on the current record, it is unclear whether Selway ever signed an NDA or what its terms were. Without such information, the court cannot conclude as a matter of law that Selway breached the NDA and thereby terminated the buyout agreement’s payment provision. 6 Document n o . 3 8 . settlement as to all other issues in the case, they shall file a

stipulation of dismissal within 14 days from the date of this

order, after which the clerk shall close the case.

SO ORDERED.

f~__________> Joseph N. Laplante United States District Judge

Dated: October 9, 2009

cc: Edwinna C . Vanderzanden, Esq. Jon Nathan Strasburger, Esq.