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Beckman v. Cybertary Franchising LLC

Court of Appeals of Utah

March 22, 2018

Patricia Beckman, Appellant,
v.
Cybertary Franchising LLC, Franchise Foundry LLC, and Christian Faulconer, Appellees.

          Fourth District Court, Provo Department The Honorable Darold J. McDade No. 110402922

          Andrew W. Stavros and Austin B. Egan, Attorneys for Appellant

          Daniel K. Brough and James C. Dunkelberger, Attorneys for Appellees.

          Judge Jill M. Pohlman authored this Opinion, in which Judges Michele M. Christiansen and David N. Mortensen concurred.

          POHLMAN, JUDGE.

         ¶1 Patricia Beckman appeals the trial court's judgment in her lawsuit against Cybertary Franchising LLC, Franchise Foundry LLC, and Christian Faulconer (collectively, Defendants). We affirm in part, reverse in part, vacate in part, and remand for further proceedings.

         BACKGROUND

         ¶2 In 2005 Beckman established Cybertary, a company offering virtual administrative services to businesses. At a business conference in 2010, Beckman met Faulconer, a principal of Franchise Foundry. Franchise Foundry provided marketing services for companies, and Faulconer expressed an interest in marketing for and investing in Cybertary.

         ¶3 Beckman and Faulconer ultimately negotiated three agreements. First, Beckman, Franchise Foundry, and another entity executed an operating agreement for Cybertary. Second, Cybertary and Franchise Foundry entered into a service agreement under which Franchise Foundry agreed to perform marketing and sales services in exchange for a minority share in Cybertary. Third, Cybertary and Beckman executed an employment agreement (the Employment Agreement) under which Cybertary agreed to employ Beckman as its chief executive officer for a three-year term "[s]ubject to earlier termination as provided in" that agreement. The Employment Agreement set a base salary for Beckman and provided for bonuses and a monthly benefits allowance. The Employment Agreement allowed Cybertary to terminate Beckman's employment for "cause" and enumerated seven events that would constitute "cause."

         ¶4 Beckman's relationship with Cybertary soured, and Cybertary failed to pay her according to the terms of the Employment Agreement. Concurrently, Beckman filed for bankruptcy on May 20, 2011. In Beckman's view, Faulconer was threatening to terminate her employment and was considering buying out her shares of Cybertary through the bankruptcy proceeding. In October 2011, Beckman's counsel sent a letter to Faulconer and a Cybertary manager threatening litigation and demanding that Cybertary pay the amounts it owed Beckman. Faulconer responded and arranged a phone call "for settlement purposes only."

         ¶5 On October 19, 2011, Beckman and Faulconer had a ninety-minute phone call, which Beckman recorded (the October conversation). At the beginning of the call, Faulconer stated, "This whole conversation . . . is really just for settlement purposes only . . . ." Beckman acknowledged this preface, stating, "Now you said this discussion is for settlement purposes only, " and, "If . . . this entire discussion is aiming towards a settlement, what is it that you propose?" She and Faulconer then candidly discussed Beckman's grievances but did not resolve them.

         ¶6 On November 2, 2011, Beckman sued Cybertary. Beckman alleged claims for breach of contract and unjust enrichment based on Cybertary's failure to pay her base salary and benefits allowance. Because Beckman expected that all amounts owed to her before May 2011 would be addressed in the bankruptcy proceeding, she sought compensation only for those amounts that came due after her bankruptcy filing.

         ¶7 Two weeks later, on November 14, 2011, Cybertary formally notified Beckman that, "effective immediately, " it was terminating her employment for cause. The notice cited three subsections of the Employment Agreement's termination provision to support its determination of cause: subsections 6(b)(ii), (iii), and (vi).[1] As evidence of cause, Cybertary explained that it had reason to believe that Beckman had engaged in certain conduct that discredited Cybertary or was detrimental to its reputation or its results of operation or business, pursuant to subsection 6(b)(vi). Cybertary further explained,

Not only does that [particular] conduct fall squarely within Section 6(b)(vi) . . . and its prohibition on conduct that harms Cybertary's reputation or operations, but [it] also constitutes "gross neglect" or "dereliction" of your duties pursuant to Section 6(b)(ii) . . ., as well as "material misconduct with regard to" Cybertary pursuant to Section 6(b)(iii) . . . .
As further evidence of cause, Cybertary believes that you have failed to perform certain crucial duties related to your responsibility as Cybertary's chief executive officer. Those failures constitute "habitual neglect" or "dereliction" of your duties pursuant to Section 6(b)(ii) . . ., as well as "material misconduct" pursuant to Section 6(b)(iii).

         The notice also stated that the grounds articulated as cause for Beckman's termination were "not intended to be a comprehensive list" and that Cybertary "reserve[d] the right to articulate additional grounds for terminating [Beckman's] employment for cause."

         ¶8 Beckman subsequently amended her complaint, adding Franchise Foundry and Faulconer as defendants. Beckman's amended breach of contract claim stated,

In retaliation for filing this lawsuit, Faulconer and Franchise Foundry have attempted on behalf of Cybertary to terminate Beckman as Chief Executive Officer for Cybertary. Faulconer and Franchise Foundry have interfered with Beckman's ability to perform her duties as Chief Executive Officer . . . . Such retaliation and actions on behalf of Cybertary further constitute a material breach of the Employment Agreement.

         Beckman also added a claim for declaratory judgment, seeking to nullify Cybertary's termination of the Employment Agreement. In her prayer for relief, Beckman indicated that at trial she would prove damages believed to be "in excess of $300, 000, plus interest, attorney's fees and costs."

         ¶9 Cybertary filed counterclaims against Beckman for, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. Cybertary alleged that Beckman had disparaged it, failed to keep its affairs confidential, and failed to perform her duties "in an effective and careful manner." Cybertary also asserted that it had "sustained significant damages" and, without specifying an amount, sought "general, specific, and consequential damages, in an amount to be proven at trial."

         ¶10 In March 2013, Beckman sought leave to amend her complaint for a second time. Beckman sought to amend her factual allegations, expand her claim for unjust enrichment, and add four new causes of action: breach of the operating agreement; breach of fiduciary duty; fraudulent inducement; and civil conspiracy. The trial court denied the motion, finding that it "was untimely and the product of unreasonable delay, " and that Defendants would be prejudiced if the amendment were allowed.

         ¶11 Beckman and Defendants subsequently filed cross-motions for summary judgment. The trial court denied Beckman's motion but granted Defendants' motion in part. Specifically, it granted summary judgment to Franchise Foundry and Faulconer on Beckman's claim for breach of the Employment Agreement. The court explained that it was undisputed that "neither Franchise Foundry nor Faulconer are parties to [the] Employment Agreement" and reasoned that Beckman could not "enforce that contract against individuals or entities that are not parties to the contract." The court otherwise denied Defendants' motion.

         ¶12 In advance of trial, Defendants filed a motion in limine, requesting that the trial court exclude the recording of the October conversation. Defendants argued that the recording constituted evidence of settlement negotiations and that it therefore should be excluded at trial pursuant to rule 408 of the Utah Rules of Evidence. The court agreed and granted Defendants' motion, ruling that "the statements captured therein constitute[d] compromise negotiations."

         ¶13 The case proceeded to trial. Although Cybertary had provided a supplemental disclosure quantifying its claimed damages as $373, 500, the trial court found that the disclosure was untimely and refused to submit the question of Cybertary's damages to the jury. The court subsequently granted Beckman's motion for a directed verdict on Cybertary's counterclaims.

         ¶14 Before submitting the case to the jury, the parties disagreed about the jury instruction defining "cause" as it related to Cybertary's termination of Beckman's employment (Instruction 12). Beckman asserted that Instruction 12 should be worded to define "cause" as the seven events enumerated in the Employment Agreement, and she argued that Cybertary was required to prove at least one event "by a preponderance of the evidence." Defendants, on the other hand, asserted that Instruction 12 should explain that the determination of whether one of the events constituted "cause" "was a matter for Cybertary's good business judgment." Defendants further proposed that Instruction 12 provide that "[s]o long as Cybertary possessed a fair and honest cause or reason, in good faith, that met one of these [seven enumerated] definitions, cause existed to terminate Beckman, whether or not the facts that Cybertary believed to be true really, in fact, were true." (Citing Uintah Basin Med. Center v. Hardy, 2005 UT App 92, ¶ 16, 110 P.3d 168.)

         ¶15 The version of Instruction 12 given to the jury included Beckman's language about Cybertary having to prove at least one of the seven enumerated events by a preponderance of the evidence, while also including Defendants' language providing that whether "cause" existed "was a matter for Cybertary's good business judgment."

         ¶16 The jury found in favor of Beckman, in part. On the special verdict form, the jury indicated that Cybertary breached the Employment Agreement by failing to pay Beckman's compensation and benefits, but did not breach the agreement by terminating her employment without cause. The jury further found that neither Franchise Foundry nor Faulconer acted with gross negligence or willful misconduct. Although Beckman sought an award of $235, 041.05, the jury determined that Cybertary owed Beckman $84, 913.83 in unpaid salary and $18, 150 in unpaid benefits, totaling $103, 063.83 in damages.

         ¶17 Beckman then moved for an award of prejudgment interest. The trial court denied the motion, concluding that Beckman's damages "are not the type of damages that are susceptible to an award of prejudgment interest."

         ¶18 Beckman and Cybertary also filed competing motions for attorney fees. Both relied on the attorney fees provision contained in the Employment Agreement. Under that provision, the "nonprevailing party" "to any proceeding under [the Employment Agreement]" pays its own and the other side's reasonable expenses, including attorney fees. The provision defined "nonprevailing party" as "the party that the court of competent jurisdiction awards less than one-half (1/2) of all of the amounts in dispute."

         ¶19 The court construed the attorney fees provision "as mandating an assessment of whether each party asserting a claim under the Employment Agreement is a 'nonprevailing party' under that claim." As to Beckman's fees request, the court determined that "[b]ecause Cybertary was awarded less than one-half of the amounts it sought against Beckman, it [was] the nonprevailing party with respect to its counterclaims, and it [was] therefore required to pay Beckman's attorney fees and costs incurred in defending against those claims." Accordingly, the court awarded Beckman $75, 317.24 against Cybertary. As to Cybertary's request for fees, the court determined that Beckman was the nonprevailing party with respect to her claims, "having recovered less than one half of the amount she sought against Cybertary." Thus, the court found, Beckman was required to pay the attorney fees and costs Cybertary incurred in defending against her claims, which amounted to $62, 181.90. The court then subtracted the amount awarded to Cybertary from the amount awarded to Beckman, resulting in a net award of attorney fees and costs of $13, 135.34 to Beckman.

         ¶20 Franchise Foundry and Faulconer also requested attorney fees. The trial court determined that because Franchise Foundry and Faulconer prevailed on summary judgment on Beckman's claim against them under the Employment Agreement, they were entitled to $27, 153.33 in attorney fees from Beckman. Beckman appeals.

         ISSUES AND STANDARDS OF REVIEW

         ¶21 Beckman advances five main claims of error on appeal. First, Beckman contends that the trial court abused its discretion by denying her motion for leave to amend her complaint. This court "will not disturb a trial court's denial of a motion to amend pleadings absent an abuse of discretion." Reller v. Argenziano, 2015 UT App 241, ¶ 14, 360 P.3d 768. Under this standard, we will reverse the trial court if its decision "exceeds the limits of reasonability." Coroles v. Sabey, 2003 UT App 339, ¶ 16, 79 P.3d 974 (citation and internal quotation marks omitted).

         ¶22 Second, Beckman contends that the trial court incorrectly applied rule 408 of the Utah Rules of Evidence and exceeded its discretion in refusing to admit an audio recording of the October conversation on the ground that the recording was evidence of compromise negotiations. We review the trial court's resolution of the legal questions underlying the admissibility of evidence for correctness and the trial court's decision to admit or exclude evidence for an abuse of discretion. See State v. Griffin, 2016 UT 33, ¶ 14, 384 P.3d 186.

         ¶23 Third, Beckman contends that Instruction 12 incorrectly defined "cause" with regard to the termination of her employment under the Employment Agreement. "A trial court's decision regarding jury instructions presents a question of law, which is reviewed for correctness." Vitale v. Belmont Springs, 916 P.2d 359, 361 (Utah Ct. App. 1996).

         ¶24 Fourth, Beckman contends that the trial court erroneously failed to award her prejudgment interest. "A trial court's decision to grant or deny prejudgment interest presents a question of law which we review for correctness." Cornia v. Wilcox, 898 P.2d 1379, 1387 (Utah 1995).

         ¶25 Fifth, Beckman contends that the trial court erred in its awards of attorney fees. "A challenge to an award of attorney fees [based on a] contract or statute . . . presents a question of law that we review for correctness." Brodkin v. Tuhaye Golf, LLC, 2015 UT App 165, ¶ 34, 355 P.3d 224.

         ANALYSIS

         I. Leave to Amend

         ¶26 First, Beckman contends that the trial court abused its discretion by denying her motion for leave to file a second amended complaint to add four new claims. Beckman argues that she should have been allowed to amend her complaint because her motion was not untimely, her delay was justified by her pending bankruptcy action, and Defendants would have had adequate time to prepare to defend against the new claims.

         ¶27 Rule 15 of the Utah Rules of Civil Procedure allows a party, before trial, to amend its pleading "once as a matter of course" within twenty-one days after serving the pleading, or, where a responsive pleading is required, the earlier of twenty- one days after service of that pleading or twenty-one days after service of a motion under rule 12(b), (e), or (f).[2] Utah R. Civ. P. 15(a)(1). Additional amendments may be filed "only with the court's permission or the opposing party's written consent." Id. R. 15(a)(2). "The court should freely give permission when justice requires." Id.

         ¶28 Our supreme court has recently explained that this standard requires a district court "to decide whether the nonmoving party has identified a ground or factor sufficient to defeat the presumption in favor of amendment." Stichting Mayflower Mountain Fonds v. United Park City Mines Co., 2017 UT 42, ¶ 48. Among the factors that may weigh against a decision to allow an amendment are untimeliness, undue delay, prejudice to the opposing party, bad faith, and failure to cure pleading deficiencies with other, earlier amendments; but, "[t]here is no rigid test." Id. ¶¶ 47-48; see also Daniels v. Gamma West Brachytherapy, LLC, 2009 UT 66, ¶ 58, 221 P.3d 256. "Even a single consideration or factor may be enough to justify denial of a motion for leave to amend." Stichting Mayflower, 2017 UT 42, ¶ 48.

         ¶29 In reviewing a district court's decision to deny a motion for leave to amend under rule 15(a), we owe the court deference because rule 15(a) "leaves a lot of discretion in the hands of the district judge." Id. ¶ 52. We afford that discretion because we recognize that district courts "are in a much better position than appellate courts to make such case-specific determinations as whether too much time has passed to fairly allow an amendment, whether a party's delay is the result of an unfair tactic or dilatory motive, or whether some other unforeseen factor militates for or against a particular result in that particular case." Kelly v. Hard Money Funding, Inc., 2004 UT App 44, ¶ 41, 87 P.3d 734. Thus, "[t]he question presented is not whether we would have granted leave to amend. It is whether we find an abuse of discretion in the district judge's decision to deny the motion." Stichting Mayflower, 2017 UT 42, ¶ 49.

         ¶30 Under this standard, we affirm. The trial court here based its denial of Beckman's motion to amend on findings of untimeliness, unreasonable delay, and prejudice to Defendants. Beckman challenges all three of those findings but has not demonstrated that the trial court exceeded the bounds of its discretion in denying her motion on those grounds.

         ¶31 First, with respect to timeliness, Beckman argues that her motion, filed more than sixteen months after she filed her original complaint, was not untimely "as a matter of law." We do not disagree. There is, after all, no "bright line rule" against which to judge the timeliness of a motion to amend. See Kelly, 2004 UT App 44, ¶ 28. However, we are not persuaded that it was unreasonable for the trial court to conclude that Beckman's motion was untimely under the circumstances.

         ¶32 Beckman filed her motion months after the discovery deadline had passed[3] and after her lawsuit had been dormant for some time, causing the trial court judge to observe that the case had been "dragging on and dragging on and-and nothing done." Where Beckman sought to significantly expand the scope of the lawsuit by adding four new claims (including claims for fraud and conspiracy) more than sixteen months into litigation that had shown little outward progress, and months after deadlines established by rule 26 of the Utah Rules of Civil Procedure had passed, we cannot conclude that there was no reasonable basis for the court's timeliness finding.

         ¶33 Second, and closely related to her untimeliness argument, Beckman contends that she was justified in waiting to file her amended complaint because of uncertainties associated by her then-pending bankruptcy case. She argues that "moving forward with new and plausible claims for relief would have increased the likelihood that the trustee would have seized those claims, " and thus she was justified in waiting until after the bankruptcy case concluded. In evaluating a movant's justification for delay, district courts "focus[] on the reasons offered by the moving party for failing to include the new facts or allegations in the original complaint." Carter v. Bourgoin Constr., Inc., 2015 UT App 198, ¶ 11, 357 P.3d 1 (alteration in original) (citation and internal quotation marks omitted). ...


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