Court Opinion

ID: 204165
Source: CourtListenerOpinion
Date Created: 2011-02-07 06:31:23+00
Date Added: 2024-06-11T17:27:42.951007
License: Public Domain

Not for Publication in West’s Federal Reporter

             United States Court of Appeals
                          For the First Circuit

No. 09-1687

                              J. KRIST SCHELL,

                            Plaintiff, Appellee,

                                        v.

                               THOMAS W. KENT,

                           Defendant, Appellant.

             APPEAL FROM THE UNITED STATES DISTRICT COURT

                   FOR THE DISTRICT OF NEW HAMPSHIRE

            [Hon. James R. Muirhead, U.S. Magistrate Judge]

                                     Before

                        Torruella, Circuit Judge,

         Souter, Associate Justice,* and Stahl, Circuit Judge.

     K. William Clauson, with whom Clauson Atwood & Spaneas was on
brief, for appellant.
     David A. Strock, with whom Melinda J. Caterine and Fisher &
Phillips LLP were on brief, for appellee.

                              February 3, 2010

     *
      The Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
            SOUTER, Associate Justice. In late 1999, J. Krist Schell

and    Thomas    W.    Kent    (the       appellant    here)     formed    a     Nevada

corporation, Bradley Reed Lumber, LLC, to import Russian lumber for

sale in New England.          Schell originally had a one-third interest,

Kent the remainder, and the company soon borrowed a quarter of a

million dollars from Edward M. Myslik.                 The two owners personally

signed the note and a separate guarantee, and Kent agreed to

indemnify    Schell      (consistently        with    their    respective      stakes)

against any sums he might pay out under the guarantee.

            In its early years, the business did poorly, requiring

advances (some from Schell), and in 2001, disagreements between the

principals prompted Kent to ask Schell to withdraw from operations,

as Schell subsequently did.              At least from this point, the conduct

of corporate affairs become lackadaisical and remained that way

after Myslik agreed with Kent to cancel the debt to him in return

for    equity.        Over   the    years,    Schell    spoke    with     Kent   about

recovering      his    capital     and    advances    to   the   corporation,        but

accepted Kent’s representations that the company had no funds

available to pay him.

            Schell remained in the dark about the corporate financial

condition until disclosures followed in the wake of two state law

actions against him by Myslik to collect under the terms of the

note   (which     Myslik     then    claimed     to   be   outstanding)        and   the

guarantee.       Each claim was either dismissed (for a reason having

                                           -2-
nothing to do with Myslik’s agreement to cancel debt for equity) or

settled, but not before Schell had incurred legal expenses.                    1

               Schell then sued in federal court on four claims, two

against Kent directly for indemnification and breach of oral

contract, and two against the company for unjust enrichment and

fraud (claiming to reach Kent as well by piercing the corporate

veil).       The magistrate judge granted Schell’s motion for summary

judgment on the indemnification counts, and a jury returned a

verdict against Kent on the fraud count, having pierced the veil.                        2

               Kent’s first issue in this appeal is aimed at the summary

judgment, by attempting an end run around his own failure to

respond to Schell’s requests for admission under Federal Rule of

Civil       Procedure   36,    that    “[t]he   costs,    attorney’s     fees,     and

expenses      incurred    by   J.     Krist   Schell”    prior   to   judgment     “in

defending against Edward Myslik’s claims in [the two state court

lawsuits] are covered by the indemnification provisions of the

Indemnification         Agreement,      dated    February    28,      2000.”       The

     1
       Myslik first sued Schell, Kent, and Bradley Reed Lumber in
New Hampshire state court, and then instituted a parallel action
against Schell alone in Maine, seeking to attach Schell’s property
there. The Maine court dismissed the case on the basis of a forum
selection clause in the guarantee.       The New Hampshire court
dismissed the guarantee-based claim as barred by the statute of
limitations, but held that the note-based claim was allowable.
Schell and Kent separately settled that claim with Myslik.
        2
       The magistrate judge also entered judgment for Kent on the
oral contract and unjust enrichment counts, finding them barred by
the relevant statutes of limitations. Those claims are not before
us on appeal.

                                          -3-
magistrate relied on Kent’s admissions by silence, see Fed. Rule

Civ. Proc. 36(a)(3), in reaching the conclusion that there was no

genuine dispute as to material fact standing in the way of Schell’s

claim   to   be   indemnified     for   the   burden      of   defending    against

Myslik’s actions on the guarantee.            On de novo review, Pineda v.

Toomey, 533 F.3d 50, 53 (1st Cir. 2008), we see no error.

             Kent argues that the proposition he admitted merely

describes      the    subject     matter,      the        scope,     of    possible

indemnification,      not   the    application       of    the     indemnification

agreement to the particular facts of the actions in the state

courts.      He says, moreover, that any such application could be

triggered     only   by   entry   of    a   judgment      of   liability    on   the

guarantee, which was actually found to be precluded by the statute

of limitations.      But these are not sensible readings either of the

requests for admission or of the agreement to indemnify.

             The requests are specific to the particular outlays

claimed to have been made in consequence of the New Hampshire and

Maine suits: the expenses said to be covered are described as “the”

costs, fees and expenses “incurred” by Schell in defending against

“Myslik’s claims in” specifically identified lawsuits.                    These are

references to particular items, not to general delineations of

scope, and admitting their coverage under the indemnification

agreement can only be understood to mean that they are outlays Kent

is obliged to pay for.

                                        -4-
                      Kent likewise misunderstands the terms of indemnification

when he argues that a court’s judgment of liability is a necessary

condition of its application.                            The agreement covers not only

“damages              .    .   .   required   to    be    paid”    in       accordance      with    an

“underlying                judgement    [or]       settlement,”       but        also    “costs    and

expenses . . . sustained [or] incurred . . . in connection with

.   .       .    liability          resulting      from   the     [g]uarantee.”             Kent   is

responsible for such items “whether or not [he] is a party to the

underlying judgement, settlement, or other cause” of the payment,

which           may       include    “voluntarily        paying   .     .    .    sums    under    the

[g]uarantee.”                  Kent’s position would read the voluntary payment

clause right out of the indemnity agreement, and coverage for

attendant costs and expenses right along with it, which is enough

to say that his interpretation cannot be sound, even under the

authority he cites from Illinois,3 to the effect that indemnity

agreements get narrow readings, see Karsner v. Lechters Ill., Inc.,

771 N.E.2d 606, 608 (Ill. App. Ct. 2002), overruled on other

grounds, Buenz v. Frontline Transp. Co., 882 N.E.2d 525 (Ill.

2008).          The magistrate was on firm ground to rest on the admission,

and the text of the agreement is consistent with the terms of the

summary judgment.

                      Kent’s next assignment of error goes to the district

court’s denial of both his motion for judgment as a matter of law

        3
             Whose law was agreed to govern interpretation.

                                                    -5-
and his motion for new trial in response to the jury’s verdict of

fraud.   Kent had to show, respectively, that no reasonable juror

could have so found, Valentín-Almeyda v. Municipality of Aguadilla,

447 F.3d 85, 95–96 (1st Cir. 2006), or that the verdict was against

the clear weight of the evidence, id. at 104; in reviewing the

trial court’s conclusions, respectively, de novo and for abuse of

discretion, id. at 95, 103-04, we again see no mistake.   The claim

of corporate fraud extended to Kent under a count of the complaint

seeking to pierce the corporate veil, and here Kent does not except

to going behind the corporate form.     His position is simply a

challenge to the underlying grounds for a fraud verdict consistent

with the three-year limitation period: he denies that the jury had

an evidentiary basis to find that Kent told Schell that the

corporation had no money to repay capital and other contributions,

and that (for a time extending into the period allowed for suit)

Schell reasonably relied on these representations in refraining

from action to compel repayment, whereas in fact Kent made payments

to himself from corporate funds, both before and after the Myslik

debt was cancelled.4   Kent addresses this issue principally by

rehashing conflicting evidence about the date of the supposedly

pivotal event of his agreement with Myslik to cancel the debt in

     4
       In the district court, one thrust of Kent’s attack on the
jury award was directed to Schell’s recovery for the amount paid to
settle Myslik’s claim of personal liability (under the Uniform
Commercial Code) for the original corporate debt; here, Kent says
nothing specific to that particular item for damages.

                               -6-
return for granting Myslik an equity position. On this matter, the

magistrate judge simply disbelieved Kent’s version of the facts,

and the jury had ample evidence (such as the stated date of

agreement)   to   do   the   same.    The   short   answer    to   Kent   was

accordingly well stated by Schell’s counsel: among conflicting

items of evidence on which Kent argues that the jury should have

found for him there was ample evidence on which the jury did, and

was entitled to, see things Schell’s way.

            The magistrate judge catalogued this latter evidence at

exhaustive length in response to Kent’s motions.           For example, in

2001, Kent sold almost $98,000 in lumber and paid many expenses

(including a “Cost of Goods Sold - Other” expense of more than

$57,000 and sales commissions), yet paid nothing to Schell; in

2002, Kent sold over $35,000 in inventory and paid himself more

than $15,000 (in addition to sales commissions also presumably paid

to himself), but made no payments to Schell or Myslik; and in 2003,

many assets were sold and Kent received “loan payments” of $19,000

(while Myslik got another $14,400), yet nothing was paid to Schell.

We could go on, but the question is not even close and no purpose

would be served by duplicating the magistrate judge’s exposition.

            Kent’s argument that any fraud must have occurred outside

the limitations period has no merit, for the evidence sufficient

for   the    fraud     verdict   amply      supports   a     finding      that

misrepresentations made outside the limitation period were not

                                     -7-
reasonably discoverable as false, and were not known to be, until

after Myslik filed suit in state court, a time within the period

for bringing action.     Nor do we see a point of traction for Kent’s

argument that any evidence of fraud goes to the time after Schell

relinquished his equity position in the corporation and is thus

irrelevant because Schell claims to have been defrauded as a member

of   the   company;   there   is   no   such   metaphysical   limitation   in

Schell’s complaint.

            Affirmed.

                                        -8-