McCormick, Inc. v. Fredericks

946 N.W.2d 728

MCCORMICK, INC., individually and derivatively on behalf of Native Energy Construction, LLC, and Northern Improvement Company, Plaintiffs, Appellees, and Cross-Appellants

v.Terrance FREDERICKS, a/k/a Terry Fredericks, Defendant, Appellant, and Cross-Appellee

No. 20190254

Supreme Court of North Dakota.

Filed July 22, 2020

Monte L. Rogneby (argued), and Diane M. Wehrman (appeared), Bismarck, ND, for plaintiffs, appellees, and cross-appellants.

Jeffrey S. Rasmussen (argued), Louisville, CO, and Chad C. Nodland (appeared), Bismarck, ND, for defendant, appellant, and cross-appellee.

Crothers, Justice.

[¶1] Terrance Fredericks appeals from a district court judgment ordering him to pay more than $1,000,000 in damages to McCormick, Inc.; Native Energy Construction, LLC; and Northern Improvement Company. McCormick and Northern Improvement cross-appeal from a judgment denying their motion for a judicially supervised winding up of Native Energy. We affirm in part, reverse in part, and remand.

I

[¶2] In 2010, McCormick and Fredericks created Native Energy Construction to engage in construction operations related to oil production. Fredericks owned 51% of the company, and McCormick owned 49%. Fredericks was Native Energy's president, and McCormick and Northern Improvement provided management services to Native Energy for a fee of 5% of Native Energy's gross revenues.

[¶3] McCormick and Fredericks executed a purchase agreement in April 2014 for Fredericks’ purchase of McCormick's interest in Native Energy. Fredericks was unable to complete the purchase. The parties did not wind up Native Energy and the business was involuntarily dissolved by the secretary of state in May 2015.

[¶4] In 2016, McCormick and Northern Improvement sued Fredericks, alleging he breached contractual and fiduciary duties owed to Native Energy, McCormick and Northern Improvement. McCormick alleged Fredericks took distributions from Native Energy without making a corresponding distribution to McCormick, wrongfully converted Native Energy's assets for his own use, made improper payments to his wife and performed other business activities on behalf of Native Energy without McCormick's authorization.

[¶5] Fredericks counterclaimed, alleging McCormick breached a fiduciary duty by taking the 5% management fee from Native Energy's gross revenues. Fredericks also requested a judicially supervised winding up of Native Energy under N.D.C.C. § 10-32.1-51.

[¶6] Native Energy and McCormick each moved for partial summary judgment. The district court granted McCormick's and Northern Improvement's motion, concluding Fredericks breached a contract with McCormick for the purchase of $168,879 worth of Native Energy equipment. The court also concluded Fredericks individually received a $35,104 payment due to Native Energy, he received $110,624 in distributions from Native Energy for which no corresponding distribution was paid to McCormick, and Native Energy failed to pay Northern Improvement $44,400 for the transportation and reconditioning of equipment in preparation for public auction. The court ordered Fredericks to pay $203,983 to Native Energy, and $49,795.76 to McCormick for the distributions, and transfer $44,400 from Native Energy's checking account to Northern Improvement.

[¶7] The remaining issues were tried in October, 2017. That proceeding ended in a mistrial when McCormick's witness Steve McCormick testified on cross-examination about the Vogel law firm's review of master service agreements between Native Energy and third-party oil companies. McCormick testified Vogel was indirectly providing services for Native Energy. Fredericks moved for a mistrial, arguing a conflict of interest existed between Vogel, McCormick and Native Energy. The district court granted Fredericks’ motion and declared a mistrial and disqualified Vogel from representing McCormick.

[¶8] McCormick moved for reconsideration of the district court's decision to disqualify Vogel. McCormick argued Vogel's review of master service agreements was not the same or a similar matter to this case. McCormick asserted Vogel should not be disqualified from representing it because Native Energy was not adverse to McCormick and Vogel did not represent Fredericks in earlier matters. After a hearing, the court concluded Vogel had not represented Native Energy or Fredericks and this case was not the same or similar to Vogel's review of master service agreements. The court concluded Vogel was not disqualified from the case.

[¶9] After a three-day trial in September 2018, the jury found Fredericks breached his fiduciary duties to McCormick and Native Energy and Fredericks’ actions constituted fraud. The jury awarded McCormick $352,668.55 in compensatory damages and $400,000 in exemplary damages.

[¶10] McCormick moved the district court for a supervised winding up of Native Energy. Fredericks subsequently withdrew his request for a supervised winding up and opposed McCormick's motion. The court denied the motion and entered a final judgment.

II

[¶11] Fredericks argues the district court lacked jurisdiction to decide his counterclaim against McCormick for breach of fiduciary duty related to the 5% management fee. He claims the court of the Three Affiliated Tribes of the Fort Berthold Reservation had jurisdiction because the management fee agreement was a contract made on the reservation between Steve McCormick, a non-Indian, and Fredericks, a tribal member.

[¶12] This Court reviews challenges to a district court's subject matter jurisdiction de novo when the jurisdictional facts are not in dispute. Schweitzer v. Miller , 2020 ND 79, ¶ 6, 941 N.W.2d 571. "A party may raise the question of subject matter jurisdiction at any time during the proceeding." Id.

[¶13] "[T]ribal court jurisdiction is determined under the test set forth in Montana v. United States , 450 U.S. 544, 101 S.Ct. 1245, 67 L.Ed.2d 493 (1981)." Arrow Midstream Holdings, LLC v. 3 Bears Const., LLC , 2015 ND 302, ¶ 10, 873 N.W.2d 16. Generally, "the inherent sovereign powers of an Indian tribe do not extend to the activities of nonmembers of the tribe." Id. at ¶ 12 (quoting Montana , at 565, 101 S.Ct. 1245 ). An exception to the general rule is that "[a] tribe may regulate, through taxation, licensing, or other means, the activities of nonmembers who enter consensual relationships with the tribe or its members, through commercial dealing, contracts, leases, or other arrangements." Arrow , at ¶ 12 (quoting Montana , at 565, 101 S.Ct. 1245 ).

[¶14] Fredericks brought claims against McCormick, not a claim against Steve McCormick individually. Fredericks’ claims against McCormick arose from his ownership interest in Native Energy, a North Dakota limited liability company. See Arrow , 2015 ND 302, ¶ 16, 873 N.W.2d 16 ("[I]t is not the particular form of business entity used by a tribe or tribal member, but whether the business entity was created under tribal law or state law that determines if the business entity should be treated as a tribe or tribal member."). In addition, Fredericks has not shown how the exception to the general rule outlined in Montana vested the tribal court with exclusive jurisdiction over his counterclaims against McCormick. Fredericks has not claimed the management fee between Native Energy and McCormick involved a consensual relationship with the tribe. Under these facts, the district court had jurisdiction to decide the parties’ claims, and this Court has jurisdiction to decide the appeal.

III

[¶15] Fredericks argues the district court erred by not providing the jury instructions on contract law relating to the management fee. He asserts there was no agreement for the fee.

[¶16] Jury instructions should fairly inform the jury of the law applicable to the case and fairly cover the claims made by both sides of the case. Tidd v. Kroshus , 2015 ND 248, ¶ 7, 870 N.W.2d 181. A district court "is not required to instruct the jury in the exact language sought by a party if the court's instructions correctly and adequately inform the jury of the applicable law." Hildenbrand v. Capital RV Ctr., Inc. , 2011 ND 37, ¶ 21, 794 N.W.2d 733. "On appeal, we review jury instructions as a whole, and if they correctly advise the jury of the law, they are sufficient." Tidd , at ¶ 7. If the district court errs in its instructions, this Court decides whether the error was harmless. Id.

[¶17] During a discussion outside the jury's presence, Fredericks’ attorney argued jury instructions on contract law were necessary because Steve McCormick testified there was an oral agreement for the management fee between himself, on behalf of McCormick, Inc., and Fredericks. McCormick's attorney stated although Steve McCormick testified about an oral agreement, contract-related instructions were not necessary because the parties’ claims against each other were primarily breach of fiduciary duty claims. McCormick's attorney claimed without contract-related instructions, the jury still could find there was no agreement for the fee and then decide whether fiduciary duties were breached by McCormick's receipt of the fee.

[¶18] With regard to jury instructions related to contracts, the district court stated:

"[T]he only instruction that really comes to my mind here is that based on your argument and Mr. Rogneby's argument, is that an expressed contract is one the terms can be stated orally or in writing. An implied contract is one in which in its existence [its] terms are manifested by conduct."

After more discussion, the court stated, "Overall I think this is a fiduciary duty issue, so I'm not going to add any of those contract instructions." The court instructed the jury on the duties a limited liability company's members owe to the company and each other, such as the duty of loyalty, duty of care and duty of good faith and fair dealing. The court also provided instructions related to limited liability companies:

"RELIANCE ON INFORMATION AND ACTIONS OF OTHER MANAGERS

A

...