Alerus Fin., N.A. v. Erwin

911 N.W.2d 296

ALERUS FINANCIAL, N.A., Plaintiff and Appellee

v.Charles D. ERWIN, Defendant and Appellant

No. 20170275

Supreme Court of North Dakota.

Filed May 8, 2018

Heather L. Marx (argued) and Thomas G. Wallrich (on brief), Minneapolis, MN; and Peter W. Zuger (appeared), Fargo, ND, for plaintiff and appellee.

Angelyne E. Lisinski (argued), Columbus, OH; Richard A. Schwartz (appeared), Houston, TX; Jon R. Brakke (appeared) and James M. Cailao (on brief), Fargo, ND, for defendant and appellant.

Crothers, Justice.

[¶ 1] Charles Erwin appeals from an amended judgment entered in favor of Alerus Financial, N.A., for $5,265,653.09. Erwin argues the district court abused its discretion by failing to rule on his motion to amend his answer and entering judgment without allowing him to conduct discovery on Alerus’ damage claims. We affirm the amended judgment.

I

[¶ 2] Starting in 2012 Alerus made a series of loans totaling more than $15 million to Diverse Energy Systems, LLC. The loan agreement specified "Events of Default," including the failure to pay the indebtedness, the insolvency of the borrower or guarantor or the commencement of bankruptcy proceedings. Erwin was Diverse’s chief executive officer, and he signed multiple personal guaranties, promising to be personally responsible for payment of up to $4 million of Diverse’s debt owed to Alerus. In September 2015 Diverse filed for bankruptcy.

[¶ 3] In May 2016 Alerus sued Erwin for breach of contract and unjust enrichment, alleging Diverse was in default under the loan agreement and Erwin failed to make payment on the amount due under the guaranties. Alerus alleged Diverse’s indebtedness exceeded $12 million and under the guaranties Erwin was liable for at least $4 million in principal and interest. On September 6, 2016, Erwin filed an answer to Alerus’ complaint.

[¶ 4] On February 28, 2017, Alerus moved for summary judgment, arguing Diverse defaulted on its loan obligations and Erwin breached the guaranty contracts by failing to pay the amounts due under the guaranties. Alerus also filed an affidavit in support of its motion from an Alerus employee, which it claimed showed the total outstanding principal and interest on the loans to Diverse.

[¶ 5] On April 3, 2017, Erwin opposed Alerus’ motion for summary judgment, arguing disputed factual issues existed about Alerus’ damages and about Erwin’s share of Diverse’s liability to Alerus under the guaranties. Erwin also argued the guaranties were unenforceable because Erwin was fraudulently induced to execute the guaranties. He claimed that Alerus’ employee, Mike Compton, told Diverse’s chief financial officer, Todd Hass, that Alerus never pursued enforcement of guaranties and that Erwin relied on Compton’s statements in executing the guaranties. Erwin filed an affidavit in support of his brief and argued his affidavit established a factual basis for claims of fraud, deceit, intentional misrepresentation, constructive fraud, and breach of fiduciary duty. Erwin indicated he would seek leave to amend his answer to include the fraud related counterclaims.

[¶ 6] On May 22, 2017 the district court conducted a summary judgment hearing. On May 26, 2017, Erwin moved to amend his answer to include counterclaims for breach of contract, actual fraud and intentional misrepresentation, and negligent misrepresentation. On June 1, 2017 the court granted Alerus’ motion. The court ruled no genuine issues of material fact existed, Erwin breached the guaranty contracts by failing to pay Alerus upon Diverse’s default, Alerus’ total damages for Diverse’s default was $12,899,248.89, and Erwin’s share of Diverse’s indebtedness was $4 million plus interest. The court concluded Erwin failed to adequately plead the alleged fraud as an affirmative defense. Judgment was entered in favor of Alerus for $5,265,653.09, including interest, fees and costs. The judgment was later amended.

II

[¶ 7] Erwin argues the district court abused its discretion by failing to rule on his motion to amend his answer before granting summary judgment. He claims that he timely moved to amend his answer to include a counterclaim for fraud, that his fraud claim could present a full defense to Alerus’ claims, and that the court ignored his motion to amend his answer and faulted him in its order granting summary judgment for failing to plead fraud. He also argues the court preemptively rejected his fraud claim and improperly excluded his evidence.

A

[¶ 8] Alerus contends Erwin’s arguments about his motion to amend are not properly before this Court on appeal and should not be decided because Erwin failed to identify them as issues in his notice of appeal.

[¶ 9] In a civil case the notice of appeal must include a preliminary statement of the issues. N.D.R.App.P. 3(c). The explanatory note to the rule states, "The purpose of the requirement is to provide the court information to make a preliminary determination whether oral argument is unnecessary. In this list, the appellant is expected to provide the court notice of the issues of which the appellant is aware at the time the notice of appeal is filed." The rule requires a preliminary statement of the issues, and the explanatory note states the appellant is expected to include the issues it is aware of at the time the notice is filed. The failure to include an issue in the notice of appeal does not preclude review of the issue.

B

[¶ 10] "A decision on a motion to amend a pleading is addressed to the sound discretion of the district court and will not be reversed on appeal unless the court abused its discretion." Yesel v. Brandon , 2015 ND 195, ¶ 18, 867 N.W.2d 677. A court abuses its discretion when it acts in an arbitrary, unconscionable, or unreasonable manner, it misinterprets or misapplies the law, or when its decision is not the product of a rational mental process leading to a reasoned determination. Id.

[¶ 11] Before trial, a party may amend its pleading once either before being served with a responsive pleading or within twenty-one days after serving the pleading if a responsive pleading is not allowed and the action is not yet on the trial calendar. N.D.R.Civ.P. 15(a)(1). Other amendments are allowed before trial "only with the opposing party’s written consent or the court’s leave. Leave shall be freely given when justice so requires." N.D.R.Civ.P. 15(a)(2).

[¶ 12] The district court did not explicitly grant or deny Erwin’s motion. However, if a court does not rule on a motion, it may be deemed denied. See Chatman v. State , 2018 ND 77, ¶ 12, 908 N.W.2d 724 ; see also Alerus Fin., N.A. v. Marcil Grp. Inc. , 2011 ND 205, ¶ 34, 806 N.W.2d 160 (stating court did not specifically state motion was denied, but assumed it was denied based on court’s actions). In deciding Alerus’ motion for summary judgment, the court addressed Erwin’s argument that he was fraudulently induced to execute the guaranties, but the court did not consider the proposed amended answer and ultimately concluded Erwin failed to plead fraud as an affirmative defense. We view the court’s actions as a denial of Erwin’s motion to amend his answer.

[¶ 13] "A court does not abuse its discretion in denying a motion to amend a [pleading] if the proposed amendment would be futile[.]" Tangedal v. Mertens , 2016 ND 170, ¶ 6, 883 N.W.2d 871. In reviewing a decision on a motion to amend a pleading made in response to an opposing party’s motion for summary judgment, this Court has found guidance in the federal courts’ interpretation of the corresponding federal rule, stating:

"If leave to amend is sought before discovery is complete and neither party has moved for summary judgment, the accuracy of the ‘futility’ label is gauged by reference to the liberal criteria of Federal Rule of Civil Procedure 12(b)(6). In this situation, amendment is not deemed futile as long as the proposed amended complaint sets forth a general scenario which, if proven, would entitle the plaintiff to relief against the defendant on some cognizable theory. If, however, leave to amend is not sought until after discovery has closed and a summary judgment motion has been docketed, the proposed amendment must be not only theoretically viable but also solidly grounded in the record. In that type of situation, an amendment is properly classified as futile unless the allegations of the proposed amended complaint are supported by substantial evidence."

Darby v. Swenson Inc. , 2009 ND 103, ¶ 12, 767 N.W.2d 147 (quoting Hatch v. Dep’t for Children, Youth and Their Families , 274 F.3d 12, 19 (1st Cir. 2001) (citations omitted) ). We have further said, "Other courts have explained that an amendment is futile for purposes of determining whether leave to amend should be granted, if the added claim would not survive a motion for summary judgment." Darby , at ¶ 13.

[¶ 14] On February 28, 2017, Alerus moved for summary judgment. Erwin first raised his arguments about fraud in his April 3, 2017, brief opposing Alerus’ motion for summary judgment. He filed an affidavit in support of his brief opposing the motion and argued the affidavit established a factual basis for claims of fraud, deceit, and intentional misrepresentation. Erwin said he would amend his answer to include the counterclaims if necessary. The summary judgment hearing was held on May 22, 2017. Erwin did not amend his answer before the hearing, but said during the hearing that he intended to amend his answer to include the fraud claims. Alerus argued Erwin did not plead a fraud defense, the fraud claims were unsupported, and Erwin failed to amend his answer despite saying he was going to amend it long before the hearing. On May 26, 2017, Erwin moved to amend his answer.

[¶ 15] The action had been pending for over a year when Erwin moved to amend his answer. Erwin was aware of the facts relating to fraud when he filed his initial answer to Alerus’ complaint. He did not include a fraud defense or counterclaim when he answered, and he waited to make any...