Court Opinion

ID: 3161420
Source: CourtListenerOpinion
Date Created: 2015-12-10 14:07:43.13787+00
Date Added: 2024-06-11T12:00:05.155226
License: Public Domain

#27356-a-GAS
2015 S.D. 93

                         IN THE SUPREME COURT
                                 OF THE
                        STATE OF SOUTH DAKOTA

                                     ****
GRANITE BUICK GMC, INC.,
f/k/a MCKIE BUICK GMC, INC.,                Plaintiff and Appellant,

v.

ADAM RAY and GATEWAY AUTOPLEX, LLC,         Defendants and Appellees,

MCKIE FORD LINCOLN, INC.,                   Plaintiff and Appellant,

v.

SCOTT HANNA and GATEWAY
AUTOPLEX, LLC,                              Defendants and Appellees.

                               ****
                 APPEAL FROM THE CIRCUIT COURT OF
                    THE SEVENTH JUDICIAL CIRCUIT
                 PENNINGTON COUNTY, SOUTH DAKOTA
                               ****
                   THE HONORABLE JANINE M. KERN
                               Judge
                               ****

JOHN K. NOONEY
ROBERT J. GALBRAITH of
Nooney, Solay, & Van Norman, LLP
Rapid City, South Dakota                    Attorneys for plaintiffs and
                                            appellants.

ROGER A. TELLINGHUISEN
MICHAEL V. WHEELER of
DeMersseman, Jensen, Tellinghuisen
 & Huffman, LLP
Rapid City, South Dakota                    Attorneys for defendants and
                                            appellees.

                                     ****
                                            CONSIDERED ON BRIEFS
                                            ON OCTOBER 5, 2015
                                            OPINION FILED 12/09/15
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SEVERSON, Justice

[¶1.]         Adam Ray, employee of Granite Buick GMC, Inc., and Scott Hanna,

employee of McKie Ford Lincoln, Inc., signed non-compete agreements during the

course of their employment. They left their respective employment and started

their own automobile dealership, Gateway Autoplex, LLC. Granite Buick and

McKie Ford sought injunctions to enforce the non-compete agreements. A jury was

impaneled to determine Ray’s and Hanna’s affirmative defenses. The circuit court

treated the jury verdict as binding; on appeal we reversed and remanded for

findings of facts and conclusions of law. 1 On remand, the court found that the non-

compete agreements were valid pursuant to SDCL 53-9-11. However, it found in

favor of Ray and Hanna based on affirmative defenses, and therefore it did not

grant Granite Buick and McKie Ford the injunctive relief sought. Granite Buick

and McKie Ford appeal. We affirm.

                                   Background

[¶2.]         Adam Ray began his employment with Granite Buick in 2005. At the

time, Granite Buick was known as McKie Buick GMC Pontiac, Inc., and it was part

of the “McKie Automotive Group” (McKie Group) that included McKie Ford

(formerly McKie Ford Lincoln Mercury, Inc.). Therefore, Ray worked for both

Granite Buick and McKie Ford until the McKie Group split in 2012, at which time

Ray began to work exclusively for Granite Buick. In August 2006, during a weekly

meeting of sales staff, Troy Claymore, the general sales manager of the McKie

Group, presented a covenant not to compete. Ray was present at this meeting.

1.      See Granite Buick GMC, Inc. v. Ray, 2014 S.D. 78, 856 N.W.2d 799.

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Claymore told the sales staff that the covenant would only be enforced against sales

people that made a “lateral move” to a competitor. Ray testified that Claymore

represented that if employees “bettered themselves” then the agreement would not

be enforced. Other individuals present at the meeting and testifying at trial

corroborated Ray’s testimony about the representations made by Claymore.

Further, Claymore also testified that he did not intend to stop anyone from

“bettering themselves” but that in his experience in the industry, dealerships do not

typically call salesmen and offer them a management position. Although the

covenant was voluntary, there were adverse employment consequences, such as

reduced commissions, if a salesperson did not agree to the covenant. Ray was

concerned about the covenant and did not sign immediately. Ray’s direct

supervisor, Darin Rittenour, testified that he pressured Ray to sign the agreement

and reassured Ray that Claymore was “a man of his word.” On August 14, 2006,

Ray signed the covenant not to compete. 2

[¶3.]         McKie Ford hired Scott Hanna as a sales manager in June 2009. He

signed a non-competition and disclosure agreement that same month. 3 By the

2.      It provided, in part:
        On termination of my employment, for any cause whatsoever, I will not
        directly or indirectly engage in the same or similar competitive line of
        business, carried on by your Company, during the duration of my
        employment, or engage to work for any individual, firm or corporation
        engaged in the same business in your market areas for a period of one year
        subsequent to such termination, such period not to include any period of
        violation or period of time required for litigation to enforce the covenants.

3.      It stated, in relevant part:
        On termination of my employment for any cause whatsoever, I will not
        engage to work for any individual, firm, or entity engaged in the same or
                                                                   (continued . . .)
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summer of 2012, Ray and Hanna were exploring the possibility of opening their own

car dealership. A meeting with Daniel Porter in January 2013 led to the creation of

Gateway Autoplex, LLC. Articles of organization for Gateway Autoplex were filed

on February 8, 2013. They were signed by Porter on January 29, 2013, and by Ray

and Hanna on February 1, 2013. The same day they signed the articles, Ray and

Hanna personally guaranteed a lease agreement between Gateway Autoplex and

Forkner Limited Partnership II. They also informed their employers that they

would be terminating their employment.

[¶4.]        Hanna met with McKie Ford’s sole shareholder at the time, Mark

McKie, specifically informing Mark that he was leaving to open a new dealership.

Hanna was concerned that Mark would prevent him from opening his own

dealership and that it would ruin the relationship between their families. Hanna

asked Mark whether Mark would come after him in “any way whatsoever” or

whether his departure would affect the relationship between the families. Mark

responded “Shit, no, Scotty, that will never be the case. . . . This is the car business.

. . . I wish you the best of luck.” Mark testified that at the time of their

conversation, he did not know that Hanna had signed a covenant not to compete,

and he could not recall whether he made these statements to Hanna or not. Mark

testified that it was a week after this conversation when he learned of Hanna’s

_________________________________________________
(. . . continued)
         similar business or be a principal, member, or owner of any entity who is
         engaged in the same or similar line of business within 200 miles of the city
         limits of Rapid City for a period of one year subsequent to such termination,
         such period not to include any period of violation or period of time required
         for litigation to enforce the covenants.

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covenant not to compete. However, Mark did not inform Hanna of intentions to

enforce the covenant. It was about a month and a half later when Hanna learned of

the decision to enforce.

[¶5.]        Also on February 1, 2013, Ray informed Ross McKie, at the time the

sole shareholder for Granite Buick, of his resignation and intent to open and

operate Gateway Autoplex. Ray met with Claymore as well that day to discuss

Ray’s departure. Claymore asked that Ray stay for two weeks in order to train a

replacement. Ray agreed and his last day of employment was February 15. No one

informed Ray that Granite Buick intended to enforce the covenant until the last day

of Ray’s employment. On that day, Ross gave Ray a letter from Granite Buick’s

attorney. The letter was dated February 7, 2013, and it informed Ray of Granite

Buick’s intention to enforce the covenant not to compete.

[¶6.]        Based on these events, when Granite Buick and McKie Ford sued Ray

and Hanna, the former employees asserted a number of affirmative defenses to

enforcement of the covenants not to compete. Ray asserted fraudulent inducement,

equitable estoppel, promissory estoppel, and waiver. The court found that Ray had

met his burden to establish fraudulent inducement, equitable estoppel, and

promissory estoppel, but not waiver. Hanna asserted equitable estoppel,

promissory estoppel, and waiver. The court found in favor of Hanna on each of

these affirmative defenses. Granite Buick and McKie Ford now appeal alleging that

the circuit court erred by: (1) considering parol evidence on Ray’s defenses of

equitable estoppel and promissory estoppel; (2) determining that Ray established

the affirmative defenses of fraudulent inducement, equitable estoppel, and

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promissory estoppel; and (3) determining that Hanna established the affirmative

defenses of waiver, equitable estoppel, and promissory estoppel.

                                         Analysis

Whether Ray established an affirmative defense.

[¶7.]        Granite Buick asserts that the circuit court improperly considered

parol evidence, the conversation between Claymore and Ray prior to Ray entering

into the contract, to make its determination that Ray had established equitable

estoppel and promissory estoppel. However, the parties agree that “parol or

extrinsic evidence is admissible to prove fraud.” Poeppel v. Lester, 2013 S.D. 17, ¶

20, 827 N.W.2d 580, 585. “No matter how clear and unambiguous a contract might

be, parol evidence may be offered to show that the contract is invalid because of

fraud in its inducement.” Id. ¶ 21. Therefore, we first address whether Ray met his

burden to establish fraudulent inducement, thereby rendering consideration of the

other affirmative defenses, and the evidence relied on to establish those,

unnecessary.

[¶8.]        South Dakota law provides that “apparent consent [to a contract] is not

real or free and is voidable when obtained through: . . . (2) Fraud[.]” SDCL 53-4-

1(2). The acts constituting actual fraud in relation to contracts are defined in SDCL

53-4-5. It provides:

             Actual fraud in relation to contracts consists of any of the
             following acts committed by a party to the contract, or with his
             connivance, with intent to deceive another party thereto or to
             induce him to enter into the contract:
                       (1) The suggestion as a fact of that which is not true by
                           one who does not believe it to be true;

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                   (2) The positive assertion, in a manner not warranted by
                       the information of the person making it, of that which
                       is not true, though he believe it to be true;
                   (3) The suppression of that which is true by one having
                       knowledge or belief of the fact;
                   (4) A promise made without any intention of performing
                       it; or
                   (5) Any other act fitted to deceive.
             Actual fraud is always a question of fact.

SDCL 53-4-5. Granite Buick asserts that there are no facts to support the circuit

court’s determination that Ray demonstrated fraudulent inducement. According to

Granite Buick, Ray did not “better” himself by terminating his employment to

manage Gateway Autoplex (Ray went from earning a $170,000 yearly salary to

$5,000 per month) and there is no evidence that Granite Buick changed its position

that it would not enforce the covenant for employees who were actually “bettering”

themselves. Granite Buick maintains that because there was no change in its

position, there cannot be a misrepresentation which would constitute fraudulent

inducement. Ray responds that the letter he received from Granite Buick’s

attorney, dated February 7, 2013 (a week before he left his employment),

demonstrated that whether Ray “bettered” himself or not was irrelevant to Granite

Buick.

[¶9.]        Based in part on this letter, the circuit court found that whether Ray

was making a lateral move or not was irrelevant to Granite in deciding whether to

enforce the covenant not to compete. Further, it found that Ray and Hanna were to

operate and carry on as co-owners of Gateway Autoplex with Daniel Porter and to

share equally in profits; Ray and Hanna undertook “personal financial

responsibilities and risks most generally associated with the ownership of a
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business rather than simply as an employee working as a manager.” Therefore, the

court found that Ray’s move to Gateway Autoplex “constitute[d] a move to better

himself.”

[¶10.]       The circuit court’s findings of fact will not be set aside unless they are

clearly erroneous. SDCL 15-6-52(a). After a review of the record, we are not left

“with a definite and firm conviction that a mistake has been made.” See Miller v.

Jacobsen, 2006 S.D. 33, ¶ 19, 714 N.W.2d 69, 76. Fraud “may be proved otherwise

than by direct and positive evidence. Like other issues of fact it may be established

by inference arising from all the other facts and circumstances in evidence.” Funke

v. Holland Furnace Co., 78 S.D. 374, 378, 102 N.W.2d 668, 670 (S.D. 1960). Based

on Granite Buick’s actions, the court properly concluded that Granite Buick never

intended to perform the promise—that the covenant would only be enforced if an

employee made a lateral move—made by Claymore. See SDCL 53-4-5(4). Because

the court did not err in finding that Ray was fraudulently induced into entering the

contract, Ray had a valid affirmative defense to enforcement of the contract. He did

not need to establish additional defenses, and we need not address Granite Buick’s

remaining argument that the circuit court improperly used parol evidence to

determine that Ray had met his burden of proving equitable estoppel and

promissory estoppel.

Whether Hanna established an affirmative defense

[¶11.]       McKie Ford contends that Hanna did not establish the affirmative

defenses that he alleged. The court found that he met his burden for each defense

raised. We first address Hanna’s affirmative defense of waiver. “Waiver is a

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volitional relinquishment, by act or word, of a known, existing right conferred in

law or contract.” Auto-Owners Ins. v. Hansen Hous., Inc., 2000 S.D. 13, ¶ 30, 604
N.W.2d 504, 512 (quoting Harms v. Northland Ford Dealers, 1999 S.D. 143, ¶ 17,

602 N.W.2d 58, 62). “A waiver exists where one in possession of any right, whether

conferred by law or by contract, and of full knowledge of the material facts, does or

forbears the doing of something inconsistent with the existence of the right or of his

or her intention to rely upon it.” Wehrkamp v. Wehrkamp, 2009 S.D. 84, ¶ 8, 773
N.W.2d 212, 215 (quoting W. Cas. & Sur. Co. v. Am. Nat’l Fire Ins., 318 N.W.2d 126,

128 (S.D. 1982)). McKie Ford claims that none of the elements of waiver were met

because Hanna and Mark McKie never specifically referenced the covenant not to

compete in their conversation on February 1, 2013, neither knew that it existed,

and Mark was without full knowledge of the material facts. Hanna testified that he

told Mark his plans to begin Gateway Autoplex, and that in response to the

question as to whether Mark would come after him in “any way,” Mark responded

in the negative. McKie Ford maintains that this conversation is irrelevant in light

of Mark’s testimony that he was unaware that Hanna signed a covenant not to

compete.

[¶12.]       The circuit court found that when Mark responded to Hanna’s inquiry

as to whether Mark would come after Hanna, Mark “was clearly, decisively, and

unequivocally referring to the enforcement of the non-competition agreement in

that Hanna had fully informed him of his intention to open a competing dealership.”

It also found that Mark “had full knowledge of the material facts. He relinquished

his right to enforce the covenant, and that Hanna relied upon those statements.”

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Again, we are not firmly convinced that a mistake has been made. See Miller, 2006
S.D. 33, ¶ 19, 714 N.W.2d at 76. Mark was the sole shareholder of McKie Ford at

the time. Previously, he was one of three owners of the McKie Group. The non-

compete agreements had been used since 2006 and enforced in the past. Lastly,

Hanna testified at trial that Mark “knew what I meant.” The court properly made a

witness credibility determination and chose to find facts contrary to Mark’s

testimony. “[A]n appellant cannot show clear error based upon his ‘own testimony

and version of the events and not the testimony of the appellee accepted by the

[circuit] court in entering its findings. Such a biased view of the record will not

support a determination of clear error in a [circuit] court’s findings.’” Donat v.

Johnson, 2015 S.D. 16, ¶ 18, 862 N.W.2d 122, 129. Although McKie Ford seems to

argue that the non-compete needed to be specifically referenced in the conversation,

it cites no authority for such a proposition. The court did not clearly err in its

findings. The establishment of the one defense by Hanna is sufficient to uphold the

court’s decision to deny the injunctive relief sought by McKie Ford. As a result, we

do not address whether Hanna established the other affirmative defenses that the

circuit court found to exist.

                                     Conclusion

[¶13.]       The circuit court properly determined that Ray’s covenant not to

compete had been fraudulently induced. It also properly determined that McKie

Ford waived its right to enforce Hanna’s covenant not to compete. Therefore, we

affirm the court’s decision to deny Appellants the injunctive relief sought and do not

address Appellants’ remaining arguments.

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[¶14.]          GILBERTSON, Chief Justice, and ZINTER and WILBUR, Justices,

and HOUWMAN, Circuit Court Judge, concur.

[¶15.]          HOUWMAN, Circuit Court Judge, sitting for KERN, Justice,

disqualified.

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