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Cardon v. TestOut, 06-4091 (2007)

Court: Court of Appeals for the Tenth Circuit Number: 06-4091 Visitors: 14
Filed: Aug. 10, 2007
Latest Update: Feb. 21, 2020
Summary: F I L E D United States Court of Appeals Tenth Circuit UNITED STATES CO URT O F APPEALS August 10, 2007 TENTH CIRCUIT Elisabeth A. Shumaker Clerk of Court D A V ID CA RD O N , Plaintiff - Appellant, v. TESTOUT! CORPO RATION, a Utah Nos. 06-4091 & 06-4126 corporation; DIRECT LIST (D.C. No. 2:04-CV-873-PGC) SERVICES, INC., a Utah corporation; (D. Utah) M O U N T FR AN K LIN H O LD ING COM PA NY, L.L.C., a Utah limited liability company; N O EL V A LLEJO; DO UG LAS EDW AR DS; SQUIRE & COM PA NY, P.
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                                                                       F I L E D
                                                                United States Court of Appeals
                                                                        Tenth Circuit
                      UNITED STATES CO URT O F APPEALS
                                                                      August 10, 2007
                                    TENTH CIRCUIT                   Elisabeth A. Shumaker
                                                                        Clerk of Court

 D A V ID CA RD O N ,

          Plaintiff - Appellant,

 v.

 TESTOUT! CORPO RATION, a Utah
                                                  Nos. 06-4091 & 06-4126
 corporation; DIRECT LIST
                                                (D.C. No. 2:04-CV-873-PGC)
 SERVICES, INC., a Utah corporation;
                                                          (D. Utah)
 M O U N T FR AN K LIN H O LD ING
 COM PA NY, L.L.C., a Utah limited
 liability company; N O EL V A LLEJO;
 DO UG LAS EDW AR DS; SQUIRE &
 COM PA NY, P.C., a Utah corporation,

          Defendants - Appellees.



                              OR DER AND JUDGM ENT *


Before L UC ER O, M U RPH Y, and R OBIN SO N, ** Circuit Judges.


      David Cardon brought suit against TestOut! Corporation (“TestOut!”),

Direct List Services, Inc. (“DLS”), M ount Franklin Holding Company, L.L.C.

(“M ount Franklin”), Noel Vallejo, and Douglas Edwards (“defendants”), alleging

      *
        This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
      **
         The Honorable Julie A. Robinson, United States District Court Judge,
District of Kansas, sitting by designation.
claims under federal and state securities law and state common law. These claims

arise from Cardon’s sale of his stock in Testout!, DLS, and M ount Franklin

(“companies”) to Vallejo in August 2001. Cardon alleges that defendants made

fraudulent misrepresentations and omissions regarding the true profitability of the

companies during sale negotiations in 2001. The district court granted summary

judgm ent to defendants on C ardon’s claims under federal and state securities law ,

and on his claims of fraud, negligent misrepresentation, and quantum meruit 1

under Utah common law. It declined to exercise pendent jurisdiction over the

remaining state law claims, and dismissed these without prejudice. Cardon now

appeals. Exercising jurisdiction under 28 U.S.C. § 1291, we AFFIRM the district

court’s grant of summary judgment w ith respect to the federal securities claims.

W ith respect to the fraud, negligent misrepresentation, and state securities claims,

we VAC ATE the judgment of the district court with instructions to dismiss

without prejudice. W e A FFIR M the district court’s dismissal without prejudice

of Cardon’s remaining state law claims. Finally, we REVERSE the court’s

award of attorneys’ fees to the defendants.



                                          I

      In the early 1990s, David Cardon and Noel Vallejo entered into a

partnership named U nited Education Centers, which specialized in marketing

      1
          Cardon does not appeal the dismissal of his quantum meruit claim.

                                         -2-
educational products. Their partnership was governed by the United Education

Centers Partnership Agreement (“Partnership Agreement”), dated July 20, 1992.

The Partnership Agreement includes an Ownership Clause that allow s for a

gradual transfer of ownership from Vallejo to Cardon, provided that Cardon

stayed on as a partner, with Cardon’s share reaching a forty percent interest on

January 1, 1997. It also contains a Leaving Clause that stipulates the following:

      W hen either partner decides to leave United Education Centers, the
      remaining partner will buy the ownership interests of the leaving
      partner based on the previous year’s net income and according to the
      follow ing factors:

      July 1, 1992 through December 31, 1992:
      No buy out will occur due to 100% ownership by Noel Vallejo.

      January 1, 1993 through December 31, 1993:
      One times the net income for the year 1992 times the percent
      ownership.

      January 1, 1994 through December 31, 1994:
      Two times the net income for the year 1993 times the percent
      ownership.

      January 1, 1995 through December 31, 1995:
      Five times the net income for the year 1994 times the percent
      ownership.

      In 1993, Cardon and Vallejo incorporated United Education Centers, Inc.

(“U EC”). During UEC’s February 1993 organizational meeting, UEC issued

5,000 voting shares of stock each to Vallejo and Cardon, 36,250 non-voting

shares to Vallejo, and 3,750 non-voting shares to Cardon. In addition, Cardon

voluntarily entered into an Officer’s Employment Agreement (“Employment

                                        -3-
Agreement”) with UEC that required him to sell all of his U EC shares upon his

resignation. Neither UEC’s Articles of Incorporation nor the minutes of the

organizational meeting provided for Cardon to receive additional shares in the

future. Yet Cardon’s stock ownership in UEC grew yearly according to the

formula set forth in the Partnership Agreement, until he owned forty percent of

the company in 1997.

      In M ay 1998, Vallejo and Cardon formed two other corporations: DFS,

which purchased mailing lists mainly from UEC; and M ount Franklin, which held

the real estate associated with UEC’s business. That same year, UEC changed its

name to TestOut! Corporation. TestOut! had a very volatile income stream during

the late 1990s. Although 1998 was a very successful year, TestOut! suffered a

stockholder’s deficit of approximately $1 million in 1999. This business

environment strained Cardon’s relationship with Vallejo, and in December 1999,

Cardon told Vallejo he wanted to resign or split up the company. In fact, Cardon

stayed with the company for the first half of 2000 in order to ease the company’s

transition to operating without him. TestO ut!’s losses continued during this time.

      On June 12, 2000, Vallejo presented Cardon with a letter that gave him

three options in light of his expressed desire to leave the company. Option One

states, “[Cardon] sells his shares to [Vallejo] by exercising the current written

agreement.” O ption Two offered Cardon the opportunity to continue to work with

TestOut!, and Option Three provided for Vallejo to purchase Cardon’s shares and

                                         -4-
voting rights for $640,000 in exchange for Cardon’s commitment not to compete

with TestOut! for three years.

      On June 14, 2000, M r. Cardon tendered his voluntary resignation from the

company in a letter, which stated:

      I hereby resign as a Director and Corporate Secretary of TestO ut!
      Corporation, Direct Lists Services, Inc., and M ount Franklin Holding
      Company, L.L.C.

      W ith my resignation, I give to you my voting shares in these
      companies and sell all of my stock in these companies to you pursuant
      to the terms of our buy-sell agreement. This document is also used as
      written notification of termination of all Employment Agreements
      between myself and the companies listed above.

      The parties dispute whether a buy-sell agreement existed at the time Cardon

resigned. TestOut! claims that the Partnership A greement’s leaving clause

governed the terms by which Cardon was obligated to sell his shares to the

companies. Cardon asserts that UEC’s incorporation rendered the Partnership

Agreement’s leaving clause a nullity, and that no buy-sell agreement was in place

when he resigned. Parties agree, however, that the Employment Agreement

required Cardon to sell his shares upon his resignation.

      Because TestOut! was organized as a subchapter S corporation, Cardon

bore personal tax liability for the company’s income in proportion to his

ownership. TestO ut!’s practice was to make distributions to Cardon to cover his

personal tax liability. As 1998 was a profitable year for TestOut!, Cardon

incurred large personal taxes for that year. Unfortunately, TestO ut! did not file

                                         -5-
its 1998 taxes until after Cardon resigned in June 2000. Cardon therefore was

unable to collect any reimbursement from TestO ut! for his 1998 personal taxes.

In negotiating with the Internal Revenue Service (“IRS”) and the Utah State Tax

Commission an offer in compromise of his tax troubles, Cardon represented that

he no longer had any interest in the company. For example, in a letter to the IRS

dated April 10, 2001, Cardon wrote:

      TestOut! Corporation did not file its 1998 taxes until August, 2000.
      This late filing brought an enormous financial burden to my wife and
      I because I had already resigned my shares and position at TestO ut!
      Corporation (I resigned in June, 2000) and I therefore have no money
      from TestOut! to pay this 1998 tax.

      In a second, undated letter to the Utah State Tax Commission, Cardon

wrote: “In 1998, I was a 40% owner of TestOut! Corporation. . . . However, by

the time that TestO ut! accountants finally completed the 1998 tax information in

August, 2000, I had already resigned my position and shares of the company. M y

resignation date was June 14, 2000.” Based in part on these representations, the

IRS accepted Cardon’s offer in compromise and the Utah State Tax Commission

waived penalties. Additionally, in a draft letter dated January 9, 2001, to Steve

Tingley at Ray Quinney & Nebeker, 2 Cardon wrote, “On June 14, 2000, I resigned

my position at TestO ut! Corporation and sold my 40% ownership to Noel Vallejo

for $0.00.” Cardon modified the draft and sent out a final version that did not



      2
        This letter served to explain Cardon’s decision not to sign as a guarantor
for a renegotiated loan owed by TestOut! to First Security Bank.

                                        -6-
refer to a sale of ownership for $0.00. This modified letter instead stated, “In

June, 2000, I received an ultimatum from Noel Vallejo that resulted in my

resignation as a Director of the company. I received no compensation from Noel

for my 40% ownership.”

      Notwithstanding the above representations, Cardon continued to negotiate

the sale of his shares with Vallejo through 2001. On M ay 30, 2001, Vallejo sent

Cardon a letter stating:

      The buy-out formula per our agreement is as follows: W hen either
      partner decides to leave TestOut, the remaining partner will buy the
      ownership interests of the leaving partner based on the previous
      year’s net income and according to the following factors: Five times
      the net income for the year 1999, times the percent of ownership.

      TestOut’s net income in 1999 = <$1,155,222> x 5 x 40% = 0
      Direct List Services net income in 1999 = <$21,065> x 5 x 40% = 0
      M ount Franklin’s net income in 1999 = $6,933 x 5 x 40% = $13,866

Vallejo also agreed to pay Cardon $69,495 for Cardon’s TestOut!-related tax

liability (including penalties and interest). In response, Cardon wrote Vallejo,

explaining his position that the buy-out formula from the leaving clause of the

Partnership A greement did not control. That letter, dated June 13, 2001, states:

      A Corporation is not a Partnership and a Partnership is not a
      Corporation.

      The Partnership Agreement signed on July 20, 1992 is specifically
      titled “United Education Centers Partnership Agreement.” This
      Agreement also states “Partnership: Noel Roberto Vallejo and David
      Charles Cardon” on the first page. M y point is that this Agreement
      pertained to our partnership between July 20, 1992 and February 17,
      1993.

                                         -7-
      ....
      I am prepared to sell my stock in TestOut! and Direct List Services
      as required by my Officer’s Employment Agreements with these
      Corporations. But you and I have not created a Corporate B uy-Sell
      Agreement for these Corporations. This Corporate B uy-Sell
      Agreement is specifically called for in both of my Officer’s
      Employment agreements as the mechanism for selling my non-voting
      stock. Therefore, you and I need to create and sign a Corporate Buy-
      Sell Agreement before I sell my stock in these Corporations.

In response, Vallejo wrote, on June 29, 2001:

      Dear David,

      I was disappointed when I read your letter dated June 13, 2001. To
      say that we do not have a buy-sell agreement (July 20, 1992 United
      Education Centers Partnership Agreement, Leaving Clause) is to take
      away the fundamental and guiding principles we used throughout our
      business. I call upon your personal integrity and your honesty to
      uphold our buy-sell agreement.
      ....
      Although we incorporated United Education Centers on February 17,
      1993 we used the partnership agreement created on July 20, 1992 to
      transfer ownership to you on a graduated scale from July 1, 1992
      through January 1, 1997. To now say that this agreement is not valid
      because it refers to a partnership is not correct. We used this
      agreement in all aspects of our business relationship as owners of the
      company, from determining the ownership schedule, the commission
      schedule, compensation rate and for determining the buy-out formula
      upon termination of an owner.
      ....
      Please lets live up to what we have agreed to in our buy-sell
      agreement.

Vallejo followed up the letter w ith a draft agreement for the sale of Cardon’s

shares that explicitly incorporated the leaving clause of the Partnership

Agreement, and offered $13,866 for the sale of all of Cardon’s shares in the

companies per that clause ($13,866 for M ount Franklin and $0 for TestOut! and

                                         -8-
DLS). Cardon declined to sign this draft agreement, and instead sent a letter

noting “a difference of opinion regarding our Buy-Sell Agreement,” and

requesting, among other information, financial statements for TestOut!, DLS, and

M ount Franklin for the years 2000 and 2001 (year to date). Vallejo refused to

provide financial information beyond the date that Cardon resigned from the

company. He believed that because Cardon resigned in June 2000, he was not

entitled to the companies’ financial information after that date.

      At some point during the negotiations, Doug Edwards, then-Chief Financial

Officer of TestOut!, spoke with Cardon to encourage him to cooperate and

comm unicate in the negotiation to sell his shares. Edwards refused to provide

current information on the company’s valuation, and, according to Cardon, told

him that it would be too difficult and time-consuming to provide written financial

statements. Edwards did, however, provide Cardon an “oral overview,” and

stated the companies were over $3 million in debt and had almost closed their

doors in December 2000. Because Edw ards and Cardon were friends, Cardon

trusted his representations. Although he had contacted lawyers about the

possibility of compelling arbitration, Cardon decided not pursue that option.

      Instead, on August 2, 2001, Cardon entered into an agreement in which he

sold his shares in the companies to Vallejo for $15,868 (“Sale A greement”). This

figure reflects the $13,866 offer made by Vallejo for Cardon’s M ount Franklin




                                         -9-
stock in addition to $2,000 for his TestOut! and DLS shares. 3 Cardon concluded

that he was owed $2,000 for his stake in the latter two companies based on the

organizational meeting minutes for the corporations, which he claimed valued his

stock at a minimum of $1,000 per corporation. None of the clauses of the Sale

Agreement refer to the Partnership Agreement.

      The Sale A greement also provided for a payment of $74,207.15 by Vallejo

to Cardon to cover Cardon’s personal tax liability. Cardon negotiated for this

payment without informing Vallejo that the IRS had accepted a compromise offer

that significantly reduced his tax liability. Additionally, Cardon released all

claims against the companies, their officers, agents, employees, and, specifically,

Vallejo in the Sale Agreement, and agreed to pay attorneys’ fees in event of a

breach.

      At some point in 2003, Cardon learned that the companies’ financial

performance greatly improved in 2001. He subsequently filed this suit against the

defendants, claiming that, based on the companies’ improvement in 2001, his

shares were worth approximately $5 million at the time of sale. He alleges that

defendants knew the companies’ finances had improved when they negotiated the

Sale A greement and intentionally failed to disclose this information to him. H e

seeks redress under Section 10(b) of the Securities Exchange Act of 1934, 15

      3
        The record does not reveal a reason why the Agreement price of $15,868
is $2 greater than the sum of $13,866 plus $2000. W e deem this discrepancy non-
material.

                                        -10-
U.S.C. § 78j(b), Securities and Exchange Commission Rule 10b-5 thereunder,

Utah Code § 61-1-1, et seq., and various common law causes of action.

      After both parties conducted discovery, defendants filed a motion for

summary judgment on December 23, 2005. On M arch 22, 2006, the district court

granted the motion with respect to Cardon’s state and federal securities law

claims, and also granted summary judgment on his fraud, negligent

misrepresentation, and quantum meruit claims. It declined to exercise pendent

jurisdiction over the remaining claims, dominated by state law, and ordered those

claims dismissed without prejudice. Because Cardon had breached the Sale

Agreement by filing suit, the court awarded attorneys’ fees to defendants. Cardon

appeals the grant of summary judgment to defendants on his federal and state

securities claims and his fraud and negligent misrepresentation claims, as well as

the aw ard of attorneys’ fees.

                                         II

      W e review the district court’s grant of summary judgment de novo,

applying the same legal standard as the district court. Garrett v. Hew lett-Packard

Co., 
305 F.3d 1210
, 1216 (10th Cir. 2002). Summary judgment is appropriate “if

the pleadings, depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment as a matter of

law.” Fed. R. Civ. P. 56(c). In reviewing cases on summary judgment, “we view

                                        -11-
the evidence and draw reasonable inferences therefrom in the light most favorable

to the nonmoving party.” Roberts v. Printup, 
422 F.3d 1211
, 1214 (10th Cir.

2005).

                                            III

         W e first consider Cardon’s claims under § 10(b) of the Securities Exchange

Act and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Section 10(b) of the 1934

Act makes it unlawful “for any person, directly or indirectly . . . [t]o use or

employ, in connection with the purchase or sale of any security . . . any

manipulative or deceptive device or contrivance in contravention of such rules

and regulations as the Commission may prescribe.” 15 U.S.C. § 78j. Rule 10b-5

in turn provides: “It shall be unlawful for any person . . . [t]o make any untrue

statement of a material fact or to omit to state a material fact necessary in order to

make the statements made, in the light of the circumstances under which they

were made, not misleading.” 17 C.F.R. § 240.10b-5. W e have stated that the

elements of a Rule 10b-5 claim are:

         (1) the defendant made an untrue or misleading statement of material
         fact, or failed to state a material fact necessary to make statements
         not misleading; (2) the statement complained of was made in
         connection with the purchase or sale of securities; (3) the defendant
         acted with scienter, that is, with intent to defraud or recklessness; (4)
         the plaintiff relied on the misleading statements; and (5) the plaintiff
         suffered damages as a result of his reliance.

Adams v. Kinder-M organ, Inc., 
340 F.3d 1083
, 1095 (10th Cir. 2003) (emphasis

omitted) . A misrepresentation or omission is material if there is a substantial

                                           -12-
likelihood that a reasonable investor would have considered the relevant

information significant in deciding whether or not to go ahead with the securities

transaction. See Basic Inc. v. Levinson, 
485 U.S. 224
, 231-232 (1988).

      W e have previously explained that a material omission must be

“manipulative” or “deceptive” in order to form the basis of a Rule 10b-5 claim:

      The SEC’s authority to proscribe material omissions under Rule
      10b-5 cannot exceed the power granted to it under Section 10(b) of
      the Securities and Exchange Act of 1934. Ernst & Ernst v.
      Hochfelder, 
425 U.S. 185
, 214 (1976). Section 10(b) empow ers the
      SEC to promulgate rules only with respect to “manipulative” and
      “deceptive” trading practices. 15 U.S.C. § 78j(b). Accordingly, only
      those material omissions which qualify as manipulative or deceptive
      practices may properly be considered to fall within the purview of
      Rule 10b-5.

Jensen v. Kimble, 
1 F.3d 1073
, 1077 (10th Cir. 1993). In that case, the plaintiffs

(including Jensen and several related parties) sold a large portion of their shares

in a public corporation to defendant Kimble for a below-market price. Kimble

had represented to Jensen that the sale of those shares w as necessary to effectuate

a potentially lucrative merger deal. 
Id. at 1075.
Kimble explicitly told Jensen

that he could not reveal the nature of the deal, the identity of the merger partner,

or the identity of those who would receive plaintiffs’ stock following the sale. 
Id. W hen
profits from the merger deal failed to materialize, Jensen brought suit

against K imble, alleging in part that Kimble’s material omissions w ith respect to

the nature of the deal, the identity of the merger partner, and the identity of the




                                          -13-
stock purchases violated Rule 10b-5. 
Id. at 1076.
W e held that these omissions

could not form the basis of a Rule 10b-5 claim, and reasoned as follow s:

      These affirmative statements by Kimble clearly notified Jensen that
      Kimble was not disclosing certain information with respect to the
      Sage Court deal and with respect to the proposed stock transaction to
      be performed by Jensen. In other words, by virtue of the disclosures
      that Kimble did make, Jensen knew what he didn’t know. Under
      these circumstances, even assuming arguendo that a special
      relationship of trust existed between Jensen and Kimble, we do not
      believe it can be said that Kimble’s omissions misled Jensen with
      respect to any of Kimble’s other remarks. Accordingly, even
      viewing the evidence in the light most favorable to the plaintiffs, we
      conclude that Kimble’s omissions were neither manipulative nor
      deceptive within the meaning of Rule 10b-5 and thus are not
      actionable under this rule.

Id. at 1078.
      Cardon’s claims center on the failure of Vallejo and Edw ards to provide

him with information about the company’s (improving) financial performance in

2001. Yet, Cardon readily admits that he entered into the Sale Agreement

knowing that he was unaware of the company’s financial condition from the date

of his resignation onward. Thus, like Jensen, Cardon “knew what he didn’t

know.” 
Id. Cardon has
not shown that any of the statements Edwards made with

respect to the Company’s debt or its prospects in December 2000 were false.

Instead, he claims that these statements were misleading in light of the material

omissions regarding TestO ut!’s 2001 performance. Our decision in Jensen is

dispositive. As described by Cardon, Edwards’ statements were not manipulative

or deceptive as required under Rule 10b-5. Because we have determined that

                                        -14-
Cardon’s claims fail for this reason, we need not reach a decision on transaction

causation, justifiable reliance, or materiality – the three alternate grounds relied

on by the district court to find for defendants on Cardon’s securities claims.

Because there is no underlying violation of the Securities Exchange A ct, Cardon’s

claim against Vallejo under 15 U.S.C. § 78t(a) also fails. See City of

Philadelphia v. Fleming Cos., 
264 F.3d 1245
, 1270 (10th Cir. 2001).

      In conclusion, the district court’s dismissal of the federal securities claims

was proper, and no federal question remains.

                                          IV

      Cardon argues the district court erred in dismissing with prejudice his state

claims based on Utah securities law, and common law fraud and negligent

misrepresentation. Federal courts must carefully exercise their discretion when

hearing state claims based on pendent jurisdiction. United M ine W orkers v.

Gibbs, 
383 U.S. 715
, 726 (1966); see also 28 U.S.C. § 1367(c)(3). The interests

of the parties, judicial economy, and comity must be considered. 
Gibbs, 383 U.S. at 726
. Under normal circumstances, these factors counsel in favor of dismissing

state law claims without prejudice if the federal claims are dismissed before trial.

See Carnegie-M ellon Univ. v. Cohill, 
484 U.S. 343
, 350 (1988); Ball v. Renner,

54 F.3d 664
, 669 (10th Cir. 1995). W hen a district court dismisses state law

claims w ith prejudice in such circumstances, this court has not hesitated to




                                          -15-
remand with instructions to dismiss without prejudice. See, e.g., Bauchman v. W .

High Sch., 
132 F.3d 542
, 549-50 (10th Cir. 1997).

      In this case, although it dismissed most of Cardon’s state law claims

without prejudice, the district court dismissed Cardon’s fraud, negligent

misrepresentation, and state securities claims with prejudice. After holding as a

matter of law that Cardon could not show justifiable reliance with respect to his

federal securities claim, the court reasoned that his fraud and negligent

misrepresentation claims – each of which require proof of justifiable reliance –

must also fail. It further held that Cardon’s state securities claims fail because

the alleged misrepresentations and omissions were not material.

      W e hold that the court abused its discretion in reaching the merits of these

state claims. As a matter of comity, Utah may define for itself what constitutes

justifiable reliance and materiality, particularly in the tricky area of

misrepresentation by omission – given that a price for Cardon’s stock had not

been set nor a methodology established for such determination. W e also note that

Cardon will not be unfairly prejudiced as a result of this ruling, as Utah law

extends its statutes of limitations to allow refiling of claims such as his. See Utah

Code § 78-12-40. Accordingly, we vacate the judgment of the district court with

respect to Cardon’s fraud, negligent misrepresentation, and state securities claims

with instructions to dismiss without prejudice.




                                          -16-
                                            V

      Finally, Cardon appeals the district court’s award of attorneys’ fees to

defendants under the terms of the August 2, 2001 agreement. “W e review the

district court’s award of attorney fees for an abuse of discretion, but review the

underlying legal analysis de novo.” Hofer v. UNUM Life Ins. Co., 
441 F.3d 872
,

884 (10th Cir. 2006) (citation omitted).

      The district court awarded attorneys’ fees to defendants based on a written

provision in the parties’ Sale Agreement, which provided that “the defaulting

party shall pay all costs incurred by the other party in enforcing the terms hereof

including reasonable attorneys’ fees.” By bringing the instant suit, the court held

that Cardon was in default of the Release of Claims provision of the agreement

and that defendants w ere thus entitled to reasonable attorneys’ fees incurred in

defending the suit.

      Cardon contests this award, arguing that the fee-shifting provision of the

August 2, 2001 agreement is unenforceable because the agreement was induced

by fraud. See Bennett v. Coors Brew ing Co., 
189 F.3d 1221
, 1229 (10th Cir.

1999) (“Under general contract principles, it is well established that a contract is

void and unenforceable if procured through fraud.”). Because we have remanded

Cardon’s fraud claim with instructions to dismiss without prejudice, the question

of whether Cardon was fraudulently induced remains undecided. In light of

Utah’s strong interest in determining for itself the knotty fraud issues involved in

                                           -17-
this case, we conclude that the proper forum for determining whether defendants

are entitled to an award of attorneys’ fees under the contract is state rather than

federal court. 4 W e therefore reverse the district court’s award of attorneys fees.



                                        ENTERED FOR THE COURT



                                        Carlos F. Lucero
                                        Circuit Judge




      4
        W e note that it is an open question whether the attorneys’ fees awarded to
defendants in this case were in fact incurred in “enforcing” the terms of the
contract. W e consider it an oddity that defendants never sought to enforce the
Release of Claims provision through a counterclaim against Cardon; defendants
merely asserted their entitlement to fees based on a successful defense of the suit
in the lower court. Because we reverse the award of attorneys’ fees on the fraud
issue, however, we need not decide whether the fees w ere in fact incurred in
enforcing the terms of the agreement.

                                         -18-

Source:  CourtListener

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