Fain v. Integrity Envtl., LLC

982 N.W.2d 568

Scotty FAIN, Sr., Scotty Fain, Jr., and Kris Durham, Plaintiffs and Appellants

v.INTEGRITY ENVIRONMENTAL, LLC, Andrea Vigen, Lewis Vigen, and Kelly Harrelson, Defendants and Appellees

No. 20220068

Supreme Court of North Dakota.

Filed December 8, 2022

Emily J. Ramage (argued) and H. Malcolm Pippin (on brief), Williston, ND, for plaintiffs and appellants.

Morgan E. Wentz (argued), David J. Smith (on brief), and Tyler J. Malm (on brief), Bismarck, ND, for defendants and appellees.

Jensen, Chief Justice.

[¶1] Scotty Fain, Sr., Scotty Fain, Jr., and Kris Durham appeal from a district court judgment entered following findings that there was no contract between the parties, no transfer of an ownership interest in Integrity Environmental, LLC, and no violation of fiduciary duties as alleged in its complaint against Integrity Environmental, LLC ("Integrity Environmental"), Andrea Vigen, Lewis Vigen, and Kelly Harrelson. They also challenge the court's findings that a substitute arrangement agreed upon by all parties led to an accord and satisfaction, novation, and waiver of contractual rights. Because we conclude the district court did not err in its finding regarding a novation and substitution for the parties’ contractual obligations, we affirm the court's judgment.

I

[¶2] In the spring of 2019, the parties discussed formation of an environmental clean-up company that would do business, in part, on Indian reservations. After several meetings, the parties signed an operating agreement ("original agreement") that set terms for the creation of Integrity, LLC ("Integrity"). The operating agreement allocated membership interests to Andrea Vigen, Lewis Vigen, Kelly Harrelson, Fain Sr., Durham, and Fain Jr., in exchange for initial contributions of $100, $100, $100, $100, $75,000, and $75,000.

[¶3] To be eligible to perform the intended services, the business must have Tier 1 status, achieved by exclusive company ownership by a Native American. Andrea Vigen was a member of the Mandan, Hidatsa and Arikara Nation and could satisfy the Tier 1 ownership requirement. The originally discussed ownership allocation would not satisfy the requirement of exclusive Native American ownership.

[¶4] At the time the Integrity operating agreement was signed, Andrea Vigen was the owner of Integrity Environmental. Integrity Environmental had Tier 1 status. The parties dispute whether the operating agreement for Integrity was prepared in anticipation of organizing a new business entity or related to a transfer of ownership in Integrity Environmental.

[¶5] Durham provided $150,000 to Integrity Environmental in two separate increments in June and July 2019. Integrity Environmental continued to operate through summer and fall while the parties contemplated but never formally signed a consultant agreement, amended contract, and loan agreement that would replace the original agreement. A recording from a September 2019 conversation indicates the parties discussed a subsequent loan arrangement that would preserve Integrity Environmental's Tier 1 status and operations on the reservation.

[¶6] In December 2019, Andrea Vigen sent a letter to Fain Sr., Fain Jr., and Durham advising them that Integrity Environmental would be terminating their relationship. The letter characterized Durham's $150,000 to Integrity Environmental as a loan, and included a check for $3,000 in interest along with confirmation that Durham had already cashed two checks sent to him totaling $150,000.

[¶7] Fain Sr., Fain Jr., and Durham filed a complaint claiming breach of contract and fiduciary duty. Following a bench trial, the district court found that all parties knew a Native American needed to maintain exclusive ownership of Integrity Environmental in order to maintain its Tier 1 status, that the plain language of the original agreement created a new company called Integrity, that no mutual consent or consideration existed among the parties to enforce the original agreement, and that subsequent negotiations led to a final, substituted loan agreement which created an accord and satisfaction, voluntary waiver of contractual rights, and novation. The court also dismissed Fain Sr., Fain Jr., and Durham's argument that a mutual mistake about the name of the company could lead to reformation, and that Integrity Environmental, Andrea Vigen, Lewis Vigen, or Kelly Harrelson violated their fiduciary duties. Fain Sr., Fain Jr., and Durham appeal arguing the district court erred in its findings of fact and conclusions of law.

II

[¶8] Fain Sr., Fain Jr., and Durham challenge many of the district court's findings regarding whether or not the parties agreed to create a new business entity or transfer ownership interests in an existing entity, whether there were subsequent agreements, and whether the subsequent agreements were satisfied. At the center of the court's decision is the finding the parties entered into a novation eliminating all of their existing obligations by agreeing to treat Durham's $150,000 payment as a loan. Because the court's findings regarding a novation are dispositive, we begin our review with consideration of those findings.

[¶9] "Novation is the substitution of a new obligation for an existing one." N.D.C.C. § 9-13-08. A novation is made by contract and is subject to all rules governing contracts. N.D.C.C. § 9-13-09. Novation can be made between the same parties as long as intent is shown to extinguish the old obligation. N.D.C.C. § 9-13-10. Along with intent, novation requires mutual assent and sufficient consideration. N.D. Pub. Serv. Comm'n v. Valley Farmers Bean Ass'n , 365 N.W.2d 528, 543 (N.D. 1985). Additionally, terms of the contract, the character of the transaction, and the facts and circumstances surrounding the transaction can establish novation. Jedco Dev. Co., Inc. v. Bertsch , 441 N.W.2d 664, 666 (N.D. 1989). Acceptance or endorsement of a check is not by itself conclusive of novation. Schmitt v. Berwick Tp. , 488 N.W.2d 398, 401 (N.D. 1992). However, parties entering into a novation need not agree about the meaning of the terms within the original obligation. Id. The existence of a novation is a question of fact subject to a clearly erroneous standard of review. Bearce v. Yellowstone Energy Dev., LLC , 2019 ND 89, ¶ 20, 924 N.W.2d 791. "A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, if there is no evidence to support it, or if, on the entire record, we are left with a definite and firm conviction a mistake has been made." Welch Const. & Excavating, LLC v. Duong , 2016 ND 70, ¶ 5, 877 N.W.2d 292.

[¶10] Fain Sr., Fain Jr., and Durham argue the district court erred in finding that a novation discharged the original agreement. They contend the $150,000 given by Durham to Integrity Environmental was a capital contribution and not a loan because there was not the presence of a strict debtor-creditor relationship due to an absence of a fixed maturity date, and the thin capitalization structure of the company meant that...