LEE HARMELING v. THE NATIONAL MARKETING GROUP, INC.
Annotate this Case
Download PDF
RENDERED: March 11, 2005; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
2002-CA-002174-MR
LEE HARMELING
APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE STEPHEN P. RYAN, JUDGE
ACTION NO. 98-CI-002897
v.
THE NATIONAL MARKETING GROUP, INC.
APPELLEE
OPINION
AFFIRMING IN PART,
VACATING IN PART,
AND REMANDING
** ** ** ** **
BEFORE:
COMBS, CHIEF JUDGE; DYCHE AND KNOPF, JUDGES.
KNOPF, JUDGE: Lee Harmeling appeals from a judgment of the
Jefferson Circuit Court confirming a jury verdict which awarded
damages to the National Marketing Group, Inc. (National
Marketing) on its contract and breach-of-loyalty claims.
Harmeling argues that the evidence did not support an award of
damages on the breach-of-loyalty claim, and that the verdict was
obtained through false testimony by National Marketing’s
president.
Because we agree with Harmeling on the former issue,
we affirm in part, vacate in part, and remand for entry of a new
judgment.
National Marketing is a Canadian corporation with its
principal office in Waterloo, Ontario.
In 1995, National
Marketing acquired the exclusive rights to distribute a line of
Scottish-made vinyl flooring products in the United States under
the brand name “Nairn Floors.”1
In August of that year, National
Marketing hired Harmeling as a sales agent.
Under the terms of
their oral agreement, Harmeling would act as an agent for
National Marketing to find distributors for Nairn Floors in the
eastern United States.
Harmeling would pay his own expenses and
would receive a 5% commission on net sales within his territory.
Harmeling testified that the agreement was for a five-year
period, while National Marketing’s president, Paul Smith,
testified that there was no fixed term for the agreement.
Shortly after entering into the agreement, Harmeling
brought Tri-State Flooring (Tri-State), a company located in
Evansville, Indiana, to National Marketing as a potential
distributor.
Harmeling told Smith that he had done business with
Tri-State in the past.
National Marketing initially rejected
Tri-State, concluding that they were a bad credit risk.
1
Nairn Floors are manufactured by Forbo-Nairn, Ltd., a division
of Forbo International, S.A.
2
In response, Harmeling signed a personal guaranty of
payment for shipments to Tri-State.
Based on this guaranty,
National Marketing began shipping goods to Tri-State.
However,
Tri-State failed to pay National Marketing for all of the
products shipped to it.
Sometime in the fall of 1996, Harmeling
took direct control of Tri-State and moved its inventory to
Louisville.
Harmeling made two payments to National Marketing on
the amounts that Tri-State owed, reducing the balance of its debt
to $30,843.77.
Shortly thereafter, on October 28, 1996, Harmeling
signed a note to National Marketing for that amount.
Although
the exact terms of the note are in some dispute, the parties
agree that National Marketing began withholding Harmeling’s
commissions and applying those amounts to the balance of the
note.
In November 1997, National Marketing terminated
Harmeling’s employment.
At that point, the balance on the note
had been reduced to $17,344.00.
On May 26, 1998, National Marketing filed a complaint
against Harmeling seeking to recover the balance due on the note.
In response, Harmeling asserted that National Marketing
fraudulently induced him to sign the note.
He also filed a
counterclaim to recover the $13,446.00 in commissions which were
applied toward the note, and to recover commissions on sales to
his territory for a five-year period.
3
Subsequently, National Marketing filed an amended
complaint against Harmeling to include a breach-of-loyalty claim.
In support of this claim, National Marketing alleged that
Harmeling had failed to disclose his relationship with the
principals of Tri-State and with another distributor, Distinctive
Flooring.
National Marketing further alleged that Harmeling had
improperly disposed of the inventory of Tri-State after he took
control of that company.
As damages for this breach-of-loyalty
claim, National Flooring sought a return of everything received
by Harmeling while in breach, including all commissions.
The matter proceeded to a jury trial beginning on
February 8, 2002.
The jury rejected Harmeling’s claims and
awarded damages to National Marketing totaling $38,979.29.
Of
this amount, $17,344.00 was for the contract claim and $21,635.00
was for the breach-of-loyalty claim.
On February 25, 2002, the
trial court entered a judgment in this amount, including
prejudgment interest for the balance due on the note.
On March 7, 2002, Harmeling filed motions for a
judgment notwithstanding the verdict, for a new trial,2 and to
alter, amend or vacate the judgment.3
In support of his motion,
Harmeling asserted that the National Marketing’s president, Paul
2
CR 59.01.
3
CR 59.05.
4
Smith, had given false testimony at trial.
Harmeling further
argued that the damages were excessive, that the judgment was
based on insufficient evidence, that the contract claim was
invalid due to lack of consideration, and that the judgment
improperly included prejudgment interest on the note.
In an
order entered on September 20, 2002, the trial court denied the
motions.
However, the trial court agreed with Harmeling that
prejudgment interest was not appropriate and it modified the
judgment accordingly.
This appeal followed.
Harmeling does not challenge the jury verdict for
National Marketing on the note.
Likewise, he does not challenge
the adverse verdict on his counterclaims.
Rather, Harmeling
focuses on the evidence supporting the verdict and damages for
National Marketing’s breach-of-loyalty claim.
Harmeling first argues that Paul Smith gave false
testimony at trial which was material to the breach-of-loyalty
claim.
National Marketing alleged that Harmeling had failed to
disclose his relationship with Tom Otten of Distinctive Flooring.
Otten is Harmeling’s brother-in-law.
At trial, Smith testified
that at one point, Distinctive Flooring was $8,652.00 in arrears
in payment of its account.
He further testified that Distinctive
Flooring ultimately defaulted on the account and, after payment
of insurance, National Marketing had an unreimbursed loss on that
account in the amount of $865.20.
5
In an affidavit accompanying Harmeling’s motion for a
new trial, Otten disputed this testimony.
Otten stated that, in
September 1997, he had paid Distinctive Flooring’s entire balance
due on its account.
As attachments to his affidavit, Otten
included National Marketing’s September 25, 1997, invoice to
Distinctive Flooring, showing a balance due of $5,559.92, and he
included a credit card statement showing charges totaling this
amount to an Ontario restaurant.
Otten stated that he had made
these payments to the restaurant at Smith’s direction.
In a supplemental memorandum in support of his motion
for a new trial, filed on May 30, 2002, Harmeling asserted that
Smith misrepresented National Marketing’s relationship with Nairn
Floors.
At trial, Smith testified that National Marketing has an
ongoing and successful business relationship with Nairn.
He also
testified that National Marketing’s sales of Nairn Floors
improved after Harmeling was terminated.
He went on to testify
that National Marketing had hired ten or eleven new agents to
service Harmeling’s former territory, and that some of those
agents were still working for him.
Harmeling presented an affidavit from Kieran Fowley,
vice-president for North American sales and marketing for ForboNairn.
In his affidavit, Fowley states that National Marketing’s
sales of Nairn floors were “disappointing.”
Fowley added that
Forbo-Nairn’s distribution agreement with National Marketing
6
expired in October 2000 and was not renewed.
Fowley further
added that while some of National Marketing’s sales agents still
sell Nairn floors, they all work for Forbo-Nairn and not for
National Marketing.
The trial court declined to consider Harmeling’s
perjury allegations, finding that supporting affidavits were not
timely or properly filed.
National Marketing asserts that, while
Harmeling’s CR 59 motions were timely, the supporting affidavits
were not filed until more than ten days after the judgment was
entered.
The trial court also noted that Harmeling’s
supplemental memorandum, filed on May 30, 2002, was not signed.
Based on these deficiencies, National Marketing argues that the
trial court was not authorized to consider this evidence.
As an initial matter, we note that the affidavit of Tom
Otten was filed along with Harmeling’s original CR 59 motion on
March 7, 2002.
Although this affidavit was timely, the trial
court did not address it in the order denying Harmeling’s
motions.
National Marketing concedes this point, but points out
that CR 59.01(g) allows a trial court to grant a new trial based
on “[n]ewly discovered evidence, material for the party applying,
which he could not, with reasonable diligence, have discovered
and produced at the trial.”
A party cannot invoke CR 59 to raise
arguments and introduce evidence that could and should have been
7
presented during the proceedings before entry of the judgment.4
Since Harmeling had the opportunity to present this evidence at
trial, National Marketing argues that the trial court was not
required to consider it as a basis for a new trial.
The record is not entirely clear on this point.
During
his rebuttal testimony at trial, Harmeling stated that
Distinctive had paid its account as asserted in Otten’s
affidavit.
However, he admitted that he did not have the credit
card receipts.
National Marketing’s counsel objected, arguing
that the testimony was improper unless Harmeling could produce
either Otten or the receipts.
Harmeling informed the trial court
that he could have the receipts in several days, but the trial
court wanted the receipts produced that same day.
When Harmeling
stated he could not provide the receipts so quickly, the trial
court instructed him to stop testifying about them.
At the time Harmeling testified about the receipts, it
was late on Thursday afternoon.
Although Harmeling’s offer to
produce the receipts by Monday was not particularly timely, we
question the trial court’s insistence that Harmeling produce the
receipts immediately.
Nevertheless, Harmeling did not ask the
court for a continuance so he might attempt to obtain the
receipts earlier.
4
Under the circumstances, Harmeling has failed
Hopkins v. Ratliff, 957 S.W.2d 300, 301 (Ky.App. 1997).
8
to show that he was unfairly deprived of an opportunity to
present this evidence at trial.
The May 30, 2002, supplemental memorandum and Fowley’s
affidavit present a different issue.
As the trial court noted,
Harmeling’s supplemental memorandum and the certificate of
service were unsigned.
Consequently, the trial court was not
obligated to consider Fowley’s affidavit.5
Therefore, we need
not consider National Marketing’s argument that that the late
filing of Fowley’s affidavit is a jurisdictional issue that would
absolutely preclude trial court from considering the issue.6
Furthermore, we agree with the trial court that
Fowley’s affidavit would not mandate a new trial in this case.
Fowley’s affidavit addresses matters which occurred after the
relationship between National Marketing and Harmeling ended.
5
CR 11.
6
Citing Ligon Specialized Hauler, Inc. v. Smith, 691 S.W.2d 902
(Ky.App. 1985). We note, however, that the purpose of the
particularity requirement in CR 59.03 and 59.05 is to afford
notice of the grounds for and relief sought to both the court and
the opposing party so the opponent will have an opportunity to
respond and the court will have enough information to consider
the motion. See Registration Control Systems, Inc. v.
Compusystems, Inc., 922 F.2d 805, 807 (Fed. Cir., 1990); See also
Tennessee Products & Chemical Corp. v. Miller, 282 S.W.2d 52, 53
(Ky. 1955): (particularity requirement of CR 7.02 is not a mere
technical form requirement but is designed to apprise the trial
court of the specific basis upon which the party casts his
request for a ruling). Since Harmeling’s CR 59 motion was timely
filed and stated his grounds with particularity, at least with
respect to Otten’s affidavit, the trial court retained
jurisdiction to modify the judgment.
9
Although these matters may have affected the jury’s view of
Smith’s credibility, they were not directly relevant to the
merits of either of National Marketing’s claims.
The central issue in this case concerns the sufficiency
of the evidence on National Marketing’s breach-of-loyalty claim
against Harmeling.
When evaluating the sufficiency of evidence
on a motion for directed verdict or for a judgment
notwithstanding the verdict, the trial court must consider the
evidence in its strongest light in favor of the party against
whom the motion was made and must give him the advantage of every
fair and reasonable intendment that the evidence can justify.
On
appeal the appellate court considers the evidence in the same
light.7
The evidence presented at trial did not establish that
Harmeling’s conduct either amounted to a breach of loyalty or
caused any damages to National Marketing apart from his
contractual obligations.
A breach-of-loyalty claim is based on the existence of
a fiduciary duty between a principal and an agent.
One who acts
as agent for another is not permitted to deal in the subject
matter of the agency for his own benefit without the consent of
the principal.
Profits realized by an agent in the execution of
his agency belong to the principal in the absence of an agreement
7
Lovins v. Napier, 814 S.W.2d 921, 922 (Ky. 1991).
10
to the contrary.
The agent is bound to a high degree of good
faith toward his employer, and is not entitled to avail himself
of any advantage that his position may give him to profit at the
employer's expense beyond the terms of the employment agreement.8
Since Harmeling’s agreement with National Marketing was
oral, it is not clear to what extent he had a duty of loyalty.
However, Harmeling did not object to the instructions informing
the jury that he owed such a duty.
Furthermore, we agree with
the trial court that, even if Harmeling was an independent
contractor, he had a duty not to use his position against
National Marketing’s interests.9
There was no proof that Harmeling sold competing
products while he was working as an agent of National Marketing.
Furthermore, the trial court determined that there was no
evidence that Harmeling made any outside profits during the
period he was employed.
And National Marketing does not allege
that Harmeling used confidential information to enrich himself.
Rather, National Marketing focused on three specific areas:
Harmeling’s relationship with Tri-State; his conduct liquidating
8
Stewart v. Kentucky Paving Co., Inc., 557 S.W.2d 435, 437 (Ky.
App. 1977). See also Hoge v. Kentucky River Coal Corporation,
216 Ky. 51, 287 S.W. 226, 227 (Ky. 1926).
9
Hoge v. Kentucky River Coal Corporation, supra at 227.
11
the assets of Tri-State; and his relationship and dealings with
Distinctive Flooring.
In particular, National Marketing asserts that
Harmeling failed to disclose that his wife was a part owner of
Tri-State, and that Tom Otten, the owner of Distinctive Flooring,
was his brother-in-law.
However, National Marketing does not
allege that this information would have led it to reject these
potential distributors.
Indeed, National Marketing admits that
it conducted its own evaluation of both of these companies.
In
short, National Marketing failed to prove that Harmeling’s
failure to disclose this information materially prejudiced its
interests.10
Furthermore, when National Marketing initially rejected
Tri-State as a distributor, Harmeling signed a personal guaranty
for payment of Tri-State’s account.
Although Harmeling failed to
disclose his relationship with one of Tri-State’s principals,
Harmeling’s personal guaranty for Tri-State vitiated any conflict
of interest with National Marketing’s interests.
10
National Marketing focuses on evidence that Harmeling was
Distinctive Flooring’s registered agent for service of process in
Ohio. The form naming Harmeling as Distinctive Flooring’s agent
also lists Harmeling as Distinctive Flooring’s president.
However, this form was executed and filed in 1999 – well after
National Marketing terminated its relationship with Harmeling.
Harmeling’s subsequent relationship with Distinctive Flooring is
not relevant to the claim that Harmeling breached his duty of
loyalty while employed by National Marketing.
12
National Marketing also argues that Harmeling breached
his duty of loyalty by taking over the operations of Tri-State
and by liquidating its inventory without ensuring that TriState’s debt to National Marketing was paid.
National Marketing
also asserts that Harmeling failed to dispose of Tri-State’s
inventory as it directed him to do.
If Harmeling was acting as
National Marketing’s agent when he took over the operation of
Tri-State, then Harmeling would have had a duty to dispose of
Tri-State’s inventory as directed by National Marketing.
However, National Marketing does not allege that Harmeling’s
operation of Tri-State was within the scope of his agency
relationship.
Furthermore, National Marketing was aware that
Harmeling had taken over the operations of Tri-State.
By failing
to object to Harmeling’s actions, National Marketing waived any
conflict of interest.
Moreover, at National Marketing’s direction, Harmeling
signed the note agreeing to make payments on Tri-State’s debt.
Since Harmeling remained personally liable to National Marketing
by virtue of the note, any damages which might have been caused
by Harmeling’s conduct related to Tri-State are not separate from
the damages flowing from Harmeling’s contractual obligations.
In
the absence of a showing of separate damages flowing from the
breach of loyalty, National Marketing was not entitled to recover
under both its contract and breach-of-loyalty claims.
13
Therefore, we conclude that Harmeling was entitled to a
directed verdict on the breach of loyalty claim.
However, the
jury award of damages for this claim further demonstrates the
insufficiency of the evidence.
At common law, a faithless agent
forfeits any right to compensation after the breach occurs.
The
Restatement (Second) of Agency § 469 (1958) follows this rule,
but also calls for apportioning forfeitures when the agent’s
compensation is allocated to periods of time or to the completion
of specified items of work.11
Harmeling did not request an apportionment instruction
in this case.
However, the jury did not order Harmeling to
forfeit all compensation which he earned after the breach of
loyalty was alleged to have occurred.
Instead, it awarded
National Marketing $21,635.29 - $10,000.00 less than the
$31,635.29 in commissions which it paid to Harmeling.
The jury’s
award bears no relationship to the evidence presented or the
extent of Harmeling’s alleged breach of loyalty.
Consequently,
even if the breach-of-loyalty claim had been properly presented
11
Restatement (Second) of Agency § 456, comment b. See also
Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184, 207
(2d Cir., 2003), (applying common law rule to salaried employee,
but noting that apportionment of forfeiture is appropriate in
cases where the employee is paid on a transaction-by-transaction
basis); and Radio TV Reports, Inc. v. Ingersoll, 742 F. Supp. 19,
23 (D.D.C., 1990) (limiting amount of forfeiture to compensation
paid to employee during the month when breach of loyalty
occurred).
14
to the jury, we would conclude that its award of damages was not
supported by substantial evidence.
Accordingly, the judgment of the Jefferson Circuit
Court is affirmed with respect to the award of contract damages,
vacated with respect to the award of damages for breach-ofloyalty, and remanded for entry of a new judgment.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
J. Warren Bruenderman
Louisville, Kentucky
Rocco J. Celebrezze
David Bryce Barber
Jeffrey L. Parrish
Celebrezze & Keeler
Louisville, Kentucky
15
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.