Laidman v. Clark et al, No. 2:2011cv00704 - Document 52 (D. Nev. 2013)

Court Description: ORDER Denying without prejudice 43 Motion for Partial Summary Judgment. Signed by Judge Larry R. Hicks on 2/8/2013. (Copies have been distributed pursuant to the NEF - SLR)
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Laidman v. Clark et al Doc. 52 1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 DISTRICT OF NEVADA 8 *** ) ) ) Plaintiff, ) ) v. ) ) CHUCK CLARK, an individual; LOUIS ) MARTIN, an individual; TOTALFLARE, INC., a Florida corporation; CARL LUE, an ) individual; DOES I through X, inclusive; ROE ) ) corporations I through C, inclusive, ) ) Defendants. ) ) ) CHUCK CLARK, an individual; LOUIS ) MARTIN, an individual; TOTALFLARE, INC., a Florida corporation; CARL LUE, an ) individual; DOES I through X, inclusive; ROE ) ) corporations I through X, inclusive, ) ) Counter-claimants, ) ) v. ) ) JERRY LAIDMAN, an individual, ) ) Counter-defendant. ) JERRY LAIDMAN, an individual, 9 10 11 12 13 14 15 16 17 18 19 20 21 22 2:11-CV-00704-LRH-PAL ORDER 23 24 25 26 1 This is an action sounding in fraud. Before the court is plaintiff Jerry Laidman’s Motion for 2 Partial Summary Judgment (#431). Defendants Chuck Clark, Louis Martin, and Totalflare, Inc., 3 have responded (#44), and Laidman has replied (#48). 4 I. 5 Facts and Procedural History Laidman is an inventor and engineer. (Laidman’s Motion for Partial Summary Judgment 6 (“PMSJ”) #43, Ex. 1, ¶ 3.) In 2006, Laidman approached Clark and Martin with an idea for an 7 electronic flare product. (Defendants’ Response #44, Ex. 1, ¶¶ 16-17.) Laidman had had success at 8 designing these types of products in the past, and Clark and Martin had worked with Laidman (to 9 neither side’s complete satisfaction) on the sales and marketing end. (Id. at Ex. 1, ¶¶ 6-12.) The 10 2006 meeting resulted in an agreement, though the parties dispute the content of that agreement. In 11 particular, while the parties agree that Laidman was to design the electronic flare (known as the 12 TotalFlare) in return for $75,000, they disagree about whether Laidman was to assign or license his 13 patent to a newly formed company (TotalFlare, Inc.) and about whether Laidman was to receive a 14 thirty percent equity stake in that company. (Compare id. at Ex. 1, ¶ 19 with Laidman’s PMSJ #43 15 at Ex. 1, ¶ 17.) 16 TotalFlare, Inc., was founded in March 2007, listing Martin as President, Laidman as Vice 17 President, and Clark as Secretary/Treasurer. (Defendants’ Response #44 at Ex. 1, ¶ 30.) However, 18 Laidman took longer than expected in developing the TotalFlare. (Id. at Ex. 1, ¶ 30.) Over the 19 course of this development, Laidman repeatedly inquired about his stake in TotalFlare, Inc. (Id. at 20 Ex. 1, ¶ 34.) It is undisputed that Martin promised Laidman an ownership interest in the company 21 in response to these inquiries. (Id. at Ex. 1, ¶¶ 34-35.) Martin claims he made these promises, 22 knowing them to be false, to prevent Laidman from quitting. (Id. at Ex. 1, ¶ 35.) 23 Eventually, in November 2010, Martin and Clark wrote to Laidman informing him that he 24 was not entitled to an ownership interest in TotalFlare, Inc. (Laidman’s PMSJ #43 at Ex. 1, ¶ 44.) 25 1 26 Refers to the court’s docket number. 2 1 Martin and Clark had removed Laidman as Vice President of the company (without Laidman’s 2 knowledge) in October 2009. (Id. at Ex. 1, ¶ 32.) 3 Laidman has lodged fourteen claims against Martin, Clark, and TotalFlare, Inc. However, 4 only one claim concerns the instant motion for partial summary judgment: fraud. 5 II. 6 Legal Standard Summary judgment is appropriate only when “the pleadings, depositions, answers to 7 interrogatories, and admissions on file, together with the affidavits, if any, show that there is no 8 genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of 9 law.” Fed. R. Civ. P. 56(c). In assessing a motion for summary judgment, the evidence, together 10 with all inferences that can reasonably be drawn therefrom, must be read in the light most 11 favorable to the party opposing the motion. Matsushita Electric Industries Co. v. Zenith Radio 12 Corp., 475 U.S. 574, 587 (1986); County of Tuolumne v. Sonora Community Hospital, 236 F.3d 13 1148, 1154 (9th Cir. 2001). 14 The moving party bears the burden of informing the court of the basis for its motion, along 15 with evidence showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 16 477 U.S. 317, 323 (1986). On those issues for which it bears the burden of proof, the moving party 17 must make a showing that is “sufficient for the court to hold that no reasonable trier of fact could 18 find other than for the moving party.” Calderone v. United States, 799 F.2d 254, 259 (6th Cir. 19 1986); see also Idema v. Dreamworks, Inc., 162 F. Supp. 2d 1129, 1141 (C.D. Cal. 2001). 20 To successfully rebut a motion for summary judgment, the non-moving party must point to 21 facts supported by the record which demonstrate a genuine issue of material fact. Reese v. Jefferson 22 School District No. 14J, 208 F.3d 736 (9th Cir. 2000). A “material fact” is a fact “that might affect 23 the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 24 248 (1986). Where reasonable minds could differ on the material facts at issue, summary judgment 25 is not appropriate. See v. Durang, 711 F.2d 141, 143 (9th Cir. 1983). A dispute regarding a 26 material fact is considered genuine “if the evidence is such that a reasonable jury could return a 3 1 verdict for the nonmoving party.” Liberty Lobby, 477 U.S. at 248. The mere existence of a scintilla 2 of evidence in support of the plaintiff’s position will be insufficient to establish a genuine dispute; 3 there must be evidence on which the jury could reasonably find for the plaintiff. See id. at 252. 4 III. 5 Discussion To prove fraud in Nevada, a plaintiff must show by clear and convincing evidence the 6 following elements: (1) a false representation (2) which the defendant knew to be false, (3) made 7 with the intention of inducing the plaintiff to act in reliance upon the misrepresentation, and (4) 8 upon which the plaintiff does in fact rely (5) to his detriment. Lubbe v. Barba, 540 P.2d 115, 117 9 (Nev. 1975). 10 Here, defendant Martin does not dispute that he made knowing misrepresentations, the 11 intent of which was to induce Laidman to stay on the job.2 (Id. at Ex. 1, ¶ 35.) However, Martin 12 does dispute the remaining elements: that Laidman relied to his detriment upon Martin’s 13 misrepresentations. Martin argues first that Laidman cannot have been damaged by being induced 14 to perform his preexisting obligations. Second, Martin argues that there can be no reliance where, 15 as here, the promises were unenforceable for lack of consideration. 16 Taking Martin’s second argument first, it confuses the law of contract with the law of 17 fraud.3 As defined in Nevada, “justifiable reliance” in a fraud case exists when the 18 misrepresentation played a “material and substantial part in leading the plaintiff to adopt his 19 particular course.” Blanchard v. Blanchard, 839 P.2d 1320, 1322 (Nev. 1992) (quoting Lubbe). 20 Justifiable reliance also requires that the plaintiff does not have information “which would serve as 21 2 22 23 24 25 26 Defendant Clark does dispute that he made such misrepresentations, but, as discussed below, this dispute is immaterial to the resolution of Laidman’s motion. 3 The distinctions between these two are more than doctrinal: fraud requires a heightened pleading standard (in part because the allegation itself is harmful to one’s reputation), Fed. R. Civ. P. 9(b); is often subject to a different statute of limitation (in part because fraud is hard to detect), see, e.g., Nev Rev. Stat. 11.190; and usually demands clear and convincing evidence, see Lubbe, 540 P.2d at 117. 4 a danger signal and a red light to any normal person of his intelligence and experience.” 1 2 Collins v. Burns, 741 P.2d 819, 821 (Nev. 1987). While the “danger signal and red light” standard 3 might apply to some promises unsupported by consideration, not all such promises raise this kind 4 of alarm. See American Savings & Loan Association v. Stanton-Cudahy Lumber Co., 455 P.2d 39, 5 42 (Nev. 1969) (enforcing a promise unsupported by consideration because reliance on the promise 6 was “reasonable and foreseeable”). Therefore, Nevada law does not support Martin’s consideration 7 requirement. American Savings is instructive for another reason: there, reliance by one party turned an 8 9 unenforceable promise by another party into an enforceable promise. Id. This is simply the doctrine 10 of promissory estoppel, and Martin’s notion that there can be no justifiable reliance on a promise 11 unenforceable for lack of consideration is contrary to it. See Pink v. Busch, 691 P.2d 456, 459 12 (1984) (setting out the elements of Nevada promissory estoppel). Martin relies on Dennis v. First National Bank of the South, 668 S.E.2d 479 (Ga. Ct. App. 13 14 2008) for the proposition that “[t]here can be no justifiable reliance on . . . a promise unenforceable 15 for lack of consideration” in a fraud case. Again, however, the doctrine of promissory estoppel 16 renders this proposition problematic. If a fraud claim requires a promise supported by consideration 17 and justifiable reliance on that promise (along with damage to the reliant party), then by the 18 doctrine of promissory estoppel, every fraud claim involves an enforceable contract. Thus, under 19 this rule, every fraud claim is a breach of contract claim, at least when the claim is based on the 20 (false) promise’s break. With due respect to the state of Georgia, that is not the law.4 See, e.g., La 21 Pesca Grande Charters, Inc. v. Moran, 704 So. 2d 710, 712-14 (Fla. Dist. Ct. App. 1998) 22 (distinguishing fraud from breach of contract and providing examples). 23 // 24 4 25 Georgia recognizes the doctrine of promissory estoppel. See Sun-Pacific Enterprises, Inc. v. Girardot, 553 S.E.2d 638, 641 (Ga. Ct. App. 2001). 26 5 1 Martin’s next argument also hinges on contract principles. Because Laidman was only 2 induced to perform his preexisting obligations, they say, he suffered no damage as a result of the 3 fraudulent inducements. See, e.g., Sinclair v. State Bank of Jerseyville, 566 N.E.2d 44, 45 (Ill. App. 4 1991) (“[G]enerally, where as a result of a misrepresentation one is induced to perform a 5 preexisting legal obligation, there can be no injury compensable by law.”) Of course, this depends 6 on what the parties understood Laidman’s preexisting obligations to be. 7 The core dispute is whether Laidman was promised an ownership interest in TotalFlare, 8 Inc., during the April 2006 meeting. Martin has provided direct testimony that no such interest was 9 promised at the time. (Defendants’ Response #44 at Ex. 1, ¶¶ 28, 36 (“Mr. Laidman was not an 10 owner of [TotalFlare, Inc.];” “At all times, Mr. Laidman was contractually obligated to perform his 11 services under our Agreement without being given an ownership interest.”).) Since, in a ruling on a 12 motion for summary judgment, “[t]he evidence of the non-movant is to be believed,” Martin has 13 demonstrated a genuine issue of disputed material fact with respect to the terms of the April 2006 14 agreement. Liberty Lobby, 477 U.S. at 255. 15 The question is then whether–if the terms of the April 2006 agreement did not include an 16 ownership interest for Laidman–Laidman was damaged by Martin’s false promises of an 17 ownership interest. Here Martin relies on Sinclair for the rule that Laidman could not be damaged 18 by being duped into performing his obligations under the 2006 agreement. This rule has an 19 impressive pedigree, see, e.g,, 27 Richard A. Lord, Williston on Contracts § 69:32 (4th ed. 2012), 20 but the Nevada Supreme Court has not addressed it. Therefore, this court must predict how the 21 Nevada Supreme Court would treat the Sinclair rule. See Burlington Insurance Co. v. Oceanic 22 Design & Construction, Inc., 383 F.3d 940, 944 (9th Cir. 2004). 23 The Nevada Supreme Court would likely reject it. Where contractual obligations are 24 involved, this rule allows hold-ups. A hold-up occurs when one party uses its superior bargaining 25 power to extract inefficient concessions from another party. See, e.g., Bengt Holmström & John 26 Roberts, The Boundaries of the Firm Revisited, 12 Journal of Economic Perspectives 4, 74 (1998). 6 1 For example, suppose a captain of a fishing boat hires some fishermen for the day.5 When out at 2 sea, the fishermen refuse to perform unless the captain doubles their wages, and the captain–having 3 no other options except a total loss–agrees. This is a hold-up. 4 Hold-ups are discouraged in contract law. Under the preexisting duty rule, “a mere promise 5 to perform that which the promisor is already bound to do” is a promise lacking consideration and 6 therefore unenforceable. County of Clark v. Bonanza No. 1, 615 P.2d 939, 944 (Nev. 1980). In the 7 above example, the captain’s promise to double the fishermen’s wages is unenforceable under this 8 doctrine. See Alaska Packers’ Association v. Domenico, 117 F. 99, 102-05 (9th Cir. 1902). As 9 Judge Posner notes, “Allowing contract modifications to be voided in circumstances such [as 10 these] assures prospective contract parties that signing a contract is not stepping into a trap, and by 11 thus encouraging people to make contracts promotes the efficient allocation of resources.” Selmer 12 Co. v. Blakeslee-Midwest Co., 704 F.2d 924, 927 (7th Cir. 1983). However, the Sinclair rule explicitly allows this type of entrapment, at least when conjoined 13 14 with the doctrine of expectation damages. Suppose, for example, that prior to leaving shore the 15 fishermen had found a better deal with a different boat captain. The fishermen inform the first 16 captain–call him Ahab–that they are thinking about breaching their agreement (and consequently 17 paying Ahab expectation damages). But Ahab doesn’t want to go through the trouble of hiring 18 different fishermen, so he falsely tells them that the second boat is not seaworthy. The fishermen 19 then perform under their original agreement. According to the Sinclair rule, the fishermen cannot 20 recover damages for fraud, despite being caught in Ahab’s net of lies. Importantly, Ahab’s conduct is inefficient, making it a kind of hold-up. Efficient breach 21 22 (backed by expectation damages) allows a promisee to walk away from a deal if she finds a better 23 one, as long as she makes the promisor whole. Lockerby v. Sierra, 535 F.3d 1038, 1042 (9th Cir. 24 2008) (describing efficient breach). The idea is that neither party suffers: one party is able to realize 25 26 5 These facts are loosely based on Alaska Packers’ Association v. Domenico, 117 F. 99 (9th Cir. 1902). 7 1 gains, and the other party is not worse off. However, the Sinclair rule puts a thumb on the scale in 2 favor of promisors like Ahab. The promisor’s misrepresentation causes the promisee to believe 3 (falsely) that breach will not realize gains, and to act accordingly. Now one party really is worse 4 off–in other words, damaged. 5 The refusal to recognize this type of loss as “damage” reduces the incentive to contract.6 If 6 potential contracting parties have no remedy for intentional deceptions that cause them real losses, 7 even when these losses are consistent with their contractual obligations, then they will be reluctant 8 to make contracts. See Selmer, 704 F.2d at 927. Furthermore, the Sinclair rule is at odds with 9 doctrines like the implied covenant of good faith and fair dealing, which aim to protect against 10 arbitrary or unfair acts by one contracting party that work to the disadvantage of the other, even 11 when there is no breach of contract. See, e.g., Nelson v. Heer, 163 P.3d 420, 427 (Nev. 2007). 12 Indeed, the Sinclair rule inverts the protections of the implied covenant because it forbids 13 deceptions made prior to the contract but allows deceptions made afterwards. It is when parties 14 have ceased their arms-length bargaining and are bosomed in the cooperative venture memorialized 15 by the contract that the Sinclair rule permits deceit. 16 The better approach is announced by the La Pesca Grande court: “There isn’t necessarily 17 damage where there is fraud, which is why no cause of action for fraud exists unless there is 18 damage due to fraud that is separate from damages that may result from any subsequent contractual 19 breach.” 704 So. 2d at 713. That is, while separate damages due to fraud may be rare in what is 20 essentially a breach of contract action, that does not mean such damages are impossible. 21 Here, Laidman has not demonstrated any damage resulting from Martin’s deception apart 22 from damages recoverable in a breach of contract action. For example, Laidman has not provided 23 evidence of realistic opportunities he would have taken but for Martin’s deception. Nor has 24 25 26 6 And the Sinclair rule does in fact refuse to recognize this as damage: “The cited authority does not indicate the rule–deeming a party is not damaged by performing an act which that party is required to perform–is inapplicable when that party might gain by nonperformance.” 566 N.E.2d at 47. 8 1 Laidman identified work he performed beyond his contractual obligations in reliance on Martin’s 2 promises. Therefore, since Laidman has not identified damage “due to fraud that is separate from 3 damages that may result from subsequent contractual breach,” he has not carried his burden on 4 fraud at summary judgment. See Liberty Lobby, 477 U.S. at 254 (1986) (“[I]n ruling on a motion 5 for summary judgment, the judge must view the evidence presented through the prism of the 6 substantive evidentiary burden.”) 7 IV. 8 9 10 11 Conclusion While Laidman is not barred, in a fraud action, from offering evidence of damage resulting from the performance of a preexisting obligation, he has offered no such evidence traceable to Martin and Clark’s deceptions. Summary judgment is therefore not appropriate. IT IS THEREFORE ORDERED that Laidman’s Motion for Partial Summary Judgment 12 (#43) is DENIED without prejudice. 13 IT IS SO ORDERED. 14 DATED this 8th day of February, 2013. __________________________________ LARRY R. HICKS UNITED STATES DISTRICT JUDGE 15 16 17 18 19 20 21 22 23 24 25 26 9