Filed: Feb. 03, 2010
Latest Update: Feb. 21, 2020
Summary: 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 Schells property, there.summary judgment.agreement) to do the same.exhaustive length in response to Kents motions.
Not for Publication in West’s Federal Reporter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
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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.
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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.
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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.
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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.
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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
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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.
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