Brinker v. McCaslin

538 P.3d 1101

Steven K. BRINKER and Custom Specialties, LLC, Appellants,

v. Robert J. MCCASLIN et al., Defendants,andJack Muhlstein, Sprout Capital Group, LLC, and Access Asia USA, LLC, Appellees.

No. 125,657

Court of Appeals of Kansas.

Oral Argument Held July 11, 2023.

Opinion Filed October 20, 2023.

Jack D. McInnes, of McInnes Law, LLC, of Prairie Village, and Anthony W. Bonuchi, pro hac vice, of Bonuchi Law, LLC, of Kansas City, Missouri, for appellants.

Daniel R. Luppino and Scott A. Wissel, of Lewis. Rice LLC, of Kansas City, Missouri, for appellees.

Before Coble, P.J., Gardner and Cline, JJ.

Cline, J.:

Steven K. Brinker contends his former business partner, Robert J. McCaslin, sabotaged their business so McCaslin could start up a competing business (M2 Promotional Products LLC, or M2PP) with a new partner, Jack Muhlstein. Brinker sued McCaslin, Muhlstein, M2PP, and several companies controlled by Muhlstein, alleging claims for breach of fiduciary duty, conspiracy to breach fiduciary duty, tortious interference with contract and business expectancies, and violations of the Kansas Uniform Trade Secrets Act (KUTSA). The district court allowed the claims against McCaslin and M2PP to go forward but granted summary judgment as to the claims against Muhlstein and his companies. Plaintiffs appeal that decision.

We find no error in the district court's order granting summary judgment on the claims against Muhlstein's companies, so we affirm that portion of its decision. But we find genuine questions of material fact exist which prevent summary judgment on the claims against Muhlstein. We therefore reverse the court's decision granting summary judgment on those claims and remand the case for further proceedings.

FACTS

This matter is densely factual, which is ultimately reflected in our decision to reverse the district court's summary judgment order based on the existence of genuine and material factual disputes. While we address additional facts as pertinent to our decision on the various claims, we outline the dispute as follows.

Plaintiff Custom Specialties, LLC (CSI) is a promotional products company. Its business involves purchasing products from suppliers, decorating them with a customer's company logos and the like, and then packaging and delivering them according to the customer's specifications.

After working at CSI for several years, Brinker and a former coworker, Pat Hughes, bought out the founder's interest and became 50/50 co-owners in 2005. After Hughes passed away in July 2017, Brinker purchased his interest and became the sole owner of the company.

Brinker met McCaslin in 2013 through CSI's relationship with the bank where McCaslin worked. After Hughes’ death, McCaslin contacted Brinker and expressed an interest in becoming a partner in CSI. While they continued to discuss this possibility, Brinker provided McCaslin with CSI financial documents to help McCaslin evaluate a potential deal.

McCaslin told Brinker that since McCaslin was a service-disabled veteran, CSI could potentially become eligible for certification as a Service-Disabled Veteran-Owned Small Business (SDVOSB). Status as an SDVOSB would give CSI contracting advantages in the market, including the ability to bid on certain government contracts. Yet for CSI to qualify for this certification, McCaslin would have to be the majority owner.

In April 2018, Brinker and McCaslin entered an agreement for McCaslin to buy a 51% interest in CSI, with Brinker retaining a 49% ownership interest. The purchase agreement called for McCaslin to pay Brinker $100,000 in exchange for his ownership interest, plus an additional deferred payment to be calculated and come due on or about May 15, 2022. At closing, McCaslin failed to pay the full purchase price, but Brinker allowed him to pay $50,000 up front and agreed to accept the remainder later.

Along with the purchase agreement, Brinker and McCaslin executed a new CSI operating agreement naming McCaslin as a member with a 51% ownership interest and the manager of the company. Because McCaslin became the majority owner and manager, the operating agreement granted him almost unlimited authority to manage the business as he saw fit. That said, the operating agreement required McCaslin to "exercise such rights and duties in the capacity of a fiduciary" and "govern the Business and affairs of [CSI] based upon those standards."

CSI's financial struggles

McCaslin took over as CSI's manager at the beginning of May 2018. From the start of his tenure, the company was undergoing financial difficulties. While 2014 and 2015 saw CSI post its highest gross revenues since Brinker became owner, 2016 was an average year and 2017 was a down year, with CSI posting its lowest gross revenues during Brinker's ownership. As a result, comparing 2014 and 2018, revenues declined nearly $4 million—a 40% reduction.

As of April 20, 2018, CSI owed $221,046 in vendor accounts that were more than 60 days past due and an additional $158,393 in vendor accounts that were more than 90 days past due. In July 2018, McCaslin and Brinker received a letter from CIBC Bank which declared a default under CSI's line of credit with the bank, referenced an existing default in February 2017, and demanded immediate payment of $486,269.93. Also in September 2018, Brinker and McCaslin received an e-mail from Facilisgroup, a third-party vendor that provided CSI with order processing services, indicating that CSI had a past due account of more than 90 days. In December 2018, CSI's landlord notified CSI that it was three months behind on its rent. And on February 4, 2019, the landlord contacted CSI about its continued default, stating that it needed to pay its balance by that week, or the matter would be sent to outside counsel for collection.

Brinker had personally guaranteed CSI's line of credit with CIBC Bank, credit card debt with American Express, and the lease agreement.

Yet, there were also positive developments. In September 2018, CSI signed a five-year contract with Evergy that McCaslin described as a "big deal" for the company. Further, as of October 2018, McCaslin admitted that CSI had landed 18 new clients, which he estimated would increase sales by $2.5 to $3 million. In November 2018, CSI was certified as a SDVOSB by the Department of Veterans Affairs. And on February 12, 2019, CSI signed a new five-year contract to supply promotional products to employees of Terracon Consultants, Inc.

During this period, McCaslin and Brinker were also working to secure a new line of credit with Core Bank to consolidate CSI's outstanding debt into a more favorable loan and provide CSI with more operating capital to fulfill larger orders.

McCaslin meets Muhlstein

In November 2018, McCaslin was introduced to Jack Muhlstein. According to McCaslin, Muhlstein served on the board of the company for which McCaslin's wife worked, and she mentioned to Muhlstein in conversation that McCaslin had bought a promotional products company. Muhlstein told her that he would like to meet McCaslin, and the two spoke over the phone shortly after. McCaslin said he originally sought out Muhlstein's advice about the situation at CSI and hoped Muhlstein would offer help if McCaslin was having financial trouble with the business.

In the following days, McCaslin sent Muhlstein various documents, including CSI tax returns, year-end financials, company debts, and information about CSI's sales commission structure. Muhlstein responded by asking about the structure of the partnership and who guaranteed the company debt, among other things.

In December 2018, McCaslin provided Muhlstein with his Facilisgroup login credentials, which gave Muhlstein access to all of CSI's sales and customer and sales representative information. In late January 2019, McCaslin shared with Muhlstein the preliminary year-end numbers for 2018 as well as a sales analysis for 2019. And on February 3, 2019, McCaslin shared with Muhlstein the presentation CSI used to land Evergy as a client.

Muhlstein described his activities during this initial period as providing uncompensated mentoring to McCaslin. He said neither party intended at the start of the relationship for Muhlstein to become a partner in the business. Muhlstein said McCaslin shared information with him so that he would understand the nature and the standing of the company and its history, with the aim of helping CSI. Muhlstein further stated that he understood the information McCaslin sent him was confidential and he treated it as such.

Muhlstein's proposal to buy an ownership interest in CSI

On February 11, 2019, McCaslin told Brinker that Muhlstein was interested in acquiring a significant portion of Brinker's ownership interest in CSI. McCaslin followed up on this discussion the next day by e-mailing Brinker terms of the proposed agreement. These terms included Brinker transferring 35% of his 49% ownership share in CSI to Sprout Capital Group LLC (one of Muhlstein's companies) for $1. Brinker was to serve as an executive salesperson on a commission basis with no further compensation or expense reimbursements and no management involvement unless otherwise requested by McCaslin or Sprout. And McCaslin would be granted the option to buy Brinker's remaining shares at any time for the net asset value of the shares in the company. In his e-mail to Brinker, McCaslin referred to himself as "Mr. M II" and Muhlstein as "Mr. M I."

The proposed agreement explicitly did not integrate the bank debt personally guaranteed by Brinker but stated that McCaslin would "work with the current banking relationship and keep them happy or to gain a new one (if possible)."

Brinker rejected this offer.

Muhlstein's increased involvement in CSI

In late February 2019, Muhlstein became more involved in the day-to-day operations of the company, at McCaslin's request.

On February 18, Muhlstein e-mailed McCaslin a list of topics for discussion at an upcoming meeting between the two. These included replacing Julie...