Lundstrom, Jr. v. Homolka, P.A. et. al.

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
NORTHERN DIVISION
APR 1 6 2020
CLERK
LOWELL LUNDSTROM JR., 1:19-CV-01006-CBK
Plaintiff,
vs.
DANIEL M.HOMOLKA P.A., DANIEL M.
HOMOLKA,WATTS GUERRA LLP,
MIKAL C. WATTS,
MEMORANDUM OPINION AND
ORDER
Defendants.
four of plaintiff's complaint, as well as the request for punitive damages,for failure to
state a claim upon which relief can be granted under Federal Rule of Civil Procedure
12(b)(6), Doc. 21,filed by defendants Mikal C. Watts and Watts Guerra LLP.
FACTS
This matter arose out of an alleged agreement between plaintiff Lowell
Lundstrom, Jr. and defendants Mikal Watts and Daniel Homolka and their respective law
frnns, Watts Guerra LLP and Daniel M.Homolka,P.A. The agreement involved a
potential class action lawsuit that all defendants sought to file against Syngenta
Agrochemical Company ("Syngenta"), a global company that produces agrochemicals
and seeds. According to allegations in the complaint, an attorney named Daniel Ramus
introduced plaintiff to defendant Homolka in 2014, Doc. 1 at 7. Plaintiff claims that
defendant Homolka then introduced him to defendant Watts. Id, The purpose of these
introductions was for defendants Watts and Homolka to determine whether to hire
plaintiff to market the Syngenta lawsuit to potential plaintiff farmers. Id.
Sometime thereafter, defendants Watts and Homolka agreed to engage plaintiff to
conduct advertising and marketing activities for the Syngenta lawsuit. According to the
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complaint, plaintiff requested $10,000.00 per month to lease his domain name,
LostComIncome.com, and to build a website around the domain name. Id-at 8. Plaintiff
also claims that he agreed to engage in a host of other marketing related activities in
exchange for further compensation. Plaintiff agreed to make all media buys (with
funding defendants would provide), operationalize the strategic acquisition plan, create
advertising collateral, and manage the infield operations for the local town hall meetings.
Id. Plaintiff claims that the compensation he was promised to conduct these further
activities was a "lump sum bonus" of $3.4 million to be paid only if the marketing efforts
were successful enough to recmit a plaintiff class representing six million acres of
farmland. Id.
Plaintiff claims that defendants Watts and Homolka orally agreed to both forms of
compensation. Plaintiff further claims that when asked by him to reduce the agreement
to writing, defendants Watts and Homolka refused on the groimds that it would violate
Rule 5.4 of the Rules of Professional Conduct. Id. The Rules of Professional Conduct
are the official legal ethics rules in many jurisdictions around the country. Rule 5.4(a)
specifically states that "[a] lawyer or law firm shall not share legal fees with a
nonlawyer..." Rule 5.4: Professional Independence of a Lawyer, American Bar
Association, americanbar.org.
After this point, plaintiff alleges that he agreed to market the Syngenta lawsuits
and proceeded to do so. According to the complaint, this was a large effort that included
creating an overall marketing strategy, establishing and maintaining a web domain
(lostcomincome.com), producing a 30-minute long infomercial("LOST CORN
INCOME: Special Report"), arranging and managing a toll-free phone number for
prospective clients to call, managing all media buys(for formats including radio,
newspapers, and television), preparing fact sheets to give prospective clients, and
preparing budgets for all of the above. Id. at 9.
Plaintiff claims that he relied on defendants to pay him the $3.4 million bonus if
his work was successful. Plaintiff claims that he dropped other such marketing clients in
favor of defendants, purchased a tmck, and engaged in all of this marketing activity
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without compensation. Plaintiff claims that all moneys paid for the lease of his domain
name were for that purpose only. All of the other marketing work performed by him was
in anticipation of receiving the $3.4 million bonus if he met his marketing goals.
Plaintiff has brought four causes of action against all defendants:(1)breach of
contract;(2)fraudulent misrepresentation;(3)unjust enrichment; and(4) civil
conspiracy. In this motion, defendants seek to dismiss counts two, three, and four for
failure to state a claim upon which relief can be granted.
Defendants argue that plaintiff has failed to properly plead fraudulent
misrepresentation because he has failed to allege the facts of the fraud with sufficient
particularity to satisfy Rule 9(b) of the Federal Rules of Civil Procedure. Plaintiff
responds that his claims are sufficiently particular to satisfy Rule 9(b) at this early stage
of the litigation. Defendants further allege that plaintiff has not claimed that he
detrimentally relied on defendants allegedly fraudulent statements. Defendants argue that
plaintiff has not sufficiently alleged how his entering into an oral, rather than a written,
contract has caused plaintiff any harm.
Plaintiff responds that he has pled sufficient facts for defendants to be fully
informed of the allegations against them and to answer those allegations.
Defendants next argue that count three should be dismissed because damages for
imjust enrichment carmot be recovered when there is a valid contract claim. A recovery
for unjust enrichment cannot be had when there is a contract between the parties that
contemplates the alleged benefit received by the defendant. Essentially, defendants argue
that unjust enrichment and breach of contract are alternative claims that cannot coexist in
the same lawsuit.
Plaintiff disagrees, arguing that he is entitled to bring an equitable cause of action
as an alternative to his contract claim.
Defendants last argue that count four must be dismissed because plaintiff has not
alleged facts showing that a civil conspiracy existed between defendants Watts and
Homolka. In short, defendants argue that conspiracy requires an underlying tort, and that
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because plaintiff's underlying tort, his fraud claim, cannot be maintained, the civil
conspiracy claim must fall with it.
Plaintiff argues that the fraud claim should not be dismissed and, thus, there is no
lack of a valid underlying tort for the conspiracy claim.
LEGAL STANDARD
When reviewing a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), the court assumes that all facts in the complaint are true and construes any
reasonable inferences from those facts in the light most favorable to the nonmoving party.
Schaaf v. Residential Fimding Corp.. 517 F.3d 544,549(8th Cir. 2008). To decide the
motion, the court may consider the complaint, some materials that are part of the public
record, or materials embraced by the complaint. Porous Media Corp. v. Pall Corp.. 186
F.3d 1077, 1079(8th Cir.1999). To survive the motion to dismiss, the complaint must
contain "enough facts to state a claim to relief that is plausible on its face." Bell Atl.
Corp. V. Twomblv. 550 U.S. 544, 570(2007). "Factual allegations must be enough to
raise a right to relief above the speculative level..." Id. at 555. The factual contents of
the complaint must "allow the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged." Braden v. Walmart Stores. 588 F.3d 585, 594(8th
Cir.2009)(quoting Ashcroft v. Iqbal. 556 U.S. 662,678 (2009)).
That said, courts "are not bound to accept as true a legal conclusion couched as a
factual allegation." Iqbal. 556 U.S. at 678 (quoting Twomblv.550 U.S. at 555). When
evaluating a motion to dismiss under Rule 12(b)(6), a court should "begin by identifying
pleadings that, because they are no more than conclusions, are not entitled to the
assumption of truth." Id. at 679. All legal conclusions must be supported by plausible
factual allegations to survive a motion to dismiss under Rule 12(b)(6). Id.
DISCUSSION
I.
As an initial matter, defendants argue that this case should revolve solely around
the breach of contract claim. However, a fraud claim may properly be brought along
with a valid breach of contract claim under South Dakota law. "It may be conceded that
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tort usually signifies a breach of legal duty independent from contract. But such breach
of duty may arise out of a relation or state of facts created by contract." Hoffman v.
Louis Dreyfus Corp..435 N.W.2d 211. 214(S.D. 1989), quoting Smith v. Weber. 16
N.W.2d 537,539(S.D. 1944). Thus,just because parties have a contract between them
does not mean that one caimot separately defraud the other.
Defendants' first argument is that the fraudulent misrepresentation claim must fail
because plaintiff has failed to overcome Federal Rule of Civil Procedure 9(b) by alleging
the facts of the fraudulent misrepresentation claim with sufficient particularity.
Rule 9(b)states: "In alleging fraud or mistake, a party must state with particularity
the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other
conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). In order to
satisfy Rule 9(b), a pleading must specify "such matters as the time, place and contents of
the false representations, as well as the identity of the person making the
misrepresentations and what was obtained or given up thereby." Abels v. Farmers
Commodities Corp.. 259 F.3d 910,920(8^ Cir. 2001). "Put another way,the complaint
must identify the 'who, what, where, when, and how' of the alleged fraud." U.S. exrel.
Joshi V. St. Luke's Hosp.. Inc.. 441 F.3d 552, 556(8^ Cir. 2006)(quoting United States
ex rel. Costner v. URS Consultants. Inc.. 317 F.3d 883, 888(8^ Cir. 2003)). However,
that does not mean that a plaintiff need allege the facts "with complete insight before
discovery is complete." Gunderson v. ADM Investor Servs.. Inc.. 230 F.3d 1363(8^ Cir.
2000)(quoting Maldonado v. Dominguez. 137 F.3d 1,9(P^ Cir. 1998)). "The special
nature of fraud does not necessitate anything other than notice of the claim; it simply
necessitates a higher degree of notice, enabling the defendant to respond specifically, at
an early stage of the case, to potentially damaging allegations of immoral and criminal
conduct." Abels. 259 F.3d at 920.
Defendants argue that Rule 9(b) was not satisfied in this case because the
complaint did not specifically allege which of the four defendants made the supposed
fraudulent statements, nor where they were at the time, nor the specific time the
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statements were made. While it is true that this complaint walks a fine line, this court
finds that it satisfies Rule 9(b) under the particular facts and circumstances as alleged.
Reading the complaint in the light most favorable to the nonmoving party; plaintiff
is alleging that both human defendants, defendants Watts and Homolka, made the
statement in question. The fact that plaintiff is also alleging conspiracy based on the
fraudulent misrepresentation claim buttresses this reading of the complaint. The 'where'
of the alleged fraud is also simple enough,in a general sense. The statements were made
during the meeting or meetings among defendants Watts, Homolka, and plaintiff when
they were negotiating working with plaintiff to market the Syngenta lawsuits. These
meetings seem to have taken place in defendant Homolka's law office in Minneapolis,
Minnesota. The 'when' of the alleged fraud is less clear; it would seem from the
complaint that plaintiff was initially told that the agreement should not be in writing at
one point in time, and then again at a later point after plaintiff had performed some
research on the subject of Rule 5.4 of the Rules of Professional Conduct. While it is clear
that the statements were allegedly made in 2014, particular dates are omitted.
In many cases, plaintiff's complaint would not satisfy Rule 9(b). However, the
facts as alleged in the instant complaint are so outrageous, simple, and straight forward
that defendants should certainly be able to "respond specifically, at an early stage of the
case." Abels. 259 F.3d at 920. There is only one assertion that plaintiff alleges was
fraudulent: the alleged assertion by defendants that the agreement to pay plaintiff a bonus
if the case was successful could not be in writing. While the vast majority of American
jurisdictions have adopted some version of the statute of frauds requiring certain types of
contracts be in writing to be enforceable, there does not exist a contract that would be
valid if oral but would be illegal or unethical if written. Considering the fact that
defendants Watts and Homolka are both attorneys, they would know that any statements
to the contrary were false and,frankly, absurd. If an attorney made a statement asserting
that a contract of a particular nature could only be made orally, it would be beyond the
pale for them to claim that they did not remember doing so. No reasonable attorney
could do anything other than affirm or deny that they made such a statement.
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In addition to the striking nature of the statement at issue, and the fact of
defendants Watts and Homolka's status as attorneys, there is the additional context of the
negotiation to enter into a significant working relationship with plaintiff. If plaintiff's
allegations concerning the amoimt of work he did to market the Syngenta lawsuits are
true, then defendants were interviewing him for a very sizable and important undertaking.
If in that context, defendants Watts and Homolka were to state that the compensation for
all of that work could only be properly secured to plaintiff via an oral contract due to the
rules of legal ethics, they ought to remember it. Indeed, it is even difficult to imagine that
defendants Watts and Homolka could have made such a statement in good conscience.
Thus, given the striking and simple nature of the alleged fraud, the Court finds that
defendants have enough information to specifically respond to the complaint. Defendants
Watts and Homolka either represented to plaintiff that his contract could not ethically or
legally be put into writing or they did not.
Finally, defendants argue that plaintiff has not shown how he relied on the alleged
fraudulent representations to his detriment. Essentially, defendants argue that under the
facts of the complaint the only thing that plaintiff was deprived of by the alleged
fraudulent misrepresentations was a written contract. Defendants assert that since an oral
contract of this nature may be enforced, an oral contract is as good as a written one.
Thus, as plaintiff claims to have an oral contract, he has not been harmed. The Court
disagrees.
South Dakota's civil fraud statute states that "[o]ne who willfully deceives
another, with intent to induce him to alter his position to his injury or risk, is liable for
any damage which he thereby suffers." SDCL 20-10-1 (emphasis added). Assuming
without deciding that the facts as alleged in the complaint raise a valid oral contract
between plaintiff and defendants, that does not mean plaintiff did not alter his position to
his detriment by entering into an oral contract. All other things being equal, a person
with an oral contract is in a worse position than a person with a written contract in terms
of enforceability. Indeed, the terms of the contract may still be disputed and, without a
written agreement laying out those terms, plaintiffs risk of nonrecovery under those
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terms is increased. Without a written agreement it will undoubtedly be much more
difficult for plaintiff to prove that defendants Watts and Homolka agreed to pay him a
$3.4 million bonus under the alleged terms. Thus, construing all reasonable allegation in
the complaint in favor of plaintiff, he has sufficiently alleged harm for the purposes of
Rule 9(b).
As for plaintiff's detrimental reliance, it is clear from the alleged facts that
plaintiff claims to have forgone a written contract because defendants Watts and
Homolka represented to him that an oral contract could not be made between them. That
is, if plaintiff wanted the job with the compensation terms set in the manner of a bonus,
he would have to settle for an oral contract. Plaintiff claims that he relied on defendants'
assurances that they would pay him the bonus if his work was successful, and that based
on those assurances he performed a great deal of presently uncompensated marketing
work for them. That suffices to show detrimental reliance at this stage of the litigation.
II.
Defendants next argue that plaintiff cannot maintain a claim for unjust enrichment
because he alleges that there is a valid express contract between the parties.
The courts recognize two classes of implied contracts. The one is implied in
fact and the other implied in law. Mahan v. Mahan. S.D., 121 N.W.2d 367.
Those falling within the second classification generally referred to as quasi
or constructive contracts do not arise because of a manifestation of an
intention to create them, but rest upon the equitable principle that a person
shall not be permitted to enrich himself unjustly at the expense of another.
Thurston v. Cedric Sanders Co.. 125 N.W.2d 496,498(S.D. 1963).
Under South Dakota contract law,"where there is a valid express contract existing
between parties in relation to a transaction fully fixing the rights of each, there is no room
for an implied promise, or a suit on quantum meruit" Id. Essentially, when the court
finds a valid contract exists between the parties and that said contract contemplates the
conduct at issue in the unjust enrichment claim, the unjust enrichment claim must fail.
In the instant case, the Court has yet to determine that there is a valid contract
between the parties in this case. The rule above simply limits dual recovery; however,
breach of contract and unjust enrichment may be properly brought together as alternative
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theories of recovery. See Parker v. W.Dakota Insurers. Inc.. 605 N.W.2d 181, 187(S.D.
2000)(After &st finding that the plaintiff did not have a right to recover on a theory of
contract, the South Dakota Supreme Court asked: "If Parker has no contractual right to
the renewal commissions that First American sold to Western Dakota, does she have an
actionable claim for unjust enrichment against Western Dakota?"); W.J. Bachman Mech.
Sheetmetal Co. v. Wal-Mart Real Estate Bus. Tr.. 764 N.W.2d 722,725(S.D. 2009)("A
subcontractor sued a property owner seeking enforcement of a mechanic's lien, or in the
alternative, a claim under the theory of unjust enrichment."(emphasis added)).
Plaintiffs unjust enrichment theory is an alternative theory of recovery to his
breach of contract claim. While he may not recover for both on the same facts, he may
bring both causes of action in the same case.
III.
Lastly, defendants argue that plaintiff's civil conspiracy claim must fail because
the imderlying fraud claim must fail. As the fraud claim has been upheld above,
defendants' argument is rejected.
A civil conspiracy is, fundamentally, an agreement to commit a tort. To
establish a prima facie case of civil conspiracy, the plaintiff must show;(1)
two or more persons;(2) an object to be accomplished;(3) a meeting of the
minds on the object or course of action to be taken;(4)the commission of
one or more unlawful overt acts; and (5)damages as the proximate result of
the conspiracy.
Kirlin v. Halverson.758 N.W.2d 436,455(S.D. 2008). Defendants cite Kirlin in their
brief supporting this motion. While plaintiff must indeed prove additional facts to
properly make out a claim for civil conspiracy, he need not have all of those facts at this
stage of the litigation—before any discovery has been conducted. The decision in Kirlin
was based on a motion for summary judgment, meaning that discovery had already taken
place. As plaintiff's claims of civil conspiracy are plausible when the facts alleged in the
complaint are taken as true, the claim survives this motion to dismiss.
IV.
Finally, defendants argue that punitive damages cannot be awarded in this case.
"Punitive damages 'are not ordinarily recoverable in actions for breach of contract.
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because, as a general rule, damages for breach of contract are limited to the pecuniary
loss sustained." Grynberg v. Citation Oil & Gas Corp.. 573 N.W.2d 493,500(S.D. 1997)
(internal citations omitted). That said, the majority ofjurisdictions, including South
Dakota, allow punitive damages in breach of contract cases in the case of fraud. Id.
"Punitive damages may arise in these situations when the complaining party can prove an
independent tort that is separate and distinct from the breach of contract." Id.(citing
Hoffman v. Louis Drevfus Corp.. 435 N.W.2d 211,214(S.D. 1989). That is, the tort of
fraud cannot be committed "merely by breaching the contract." Id.
In the instant case, the fraud claim alleges facts beyond the breach of contract
claim. The fraud claim revolves around plaintiffs assertions that defendants Mikal Watts
and Daniel Homolka convinced him that a written contract could not be maintained imder
the circumstances, leaving plaintiff with only an oral contract to secure his rights under
the agreement. Those facts are separate and apart from any claim for breach of the
alleged oral contract between the parties. For that reason, punitive damages may
properly be maintained in this action for breach of contract and fraudulent
misrepresentation.
IT IS ORDERED that defendants' motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6), Doc. 21, is hereby DENIED.
DATED this16th day of April, 2020.
BY THE COURT:
CHARLES B. KORNMANN
United States District Judge
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