Sacramento E.D.M., Inc. v. Hynes Aviation Industries, Inc ( 2019 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS JAN 29 2019
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
SACRAMENTO E.D.M., INC.; DAN No. 17-16041
FOLK,
D.C. No. 2:13-cv-00288-KJN
Plaintiffs-Appellees,
v. MEMORANDUM*
HYNES AVIATION INDUSTRIES, INC.,
DBA Hynes Aviation Services; HYNES
CHILDREN TF LIMITED; MICHAEL K.
HYNES,
Defendants-Appellants.
SACRAMENTO E.D.M., INC.; DAN No. 17-16219
FOLK,
Plaintiffs-Appellants, D.C. No. 2:13-cv-00288-KJN
v.
HYNES AVIATION INDUSTRIES, INC.,
DBA Hynes Aviation Services; HYNES
CHILDREN TF LIMITED; MICHAEL K.
HYNES,
Defendants-Appellees.
Appeals from the United States District Court
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
for the Eastern District of California
Kendall J. Newman, Magistrate Judge, Presiding
Argued and Submitted October 9, 2018
San Francisco, California
Before: TASHIMA and MURGUIA, Circuit Judges, and HINKLE,** District
Judge.
This case arises out of a complicated, multi-year business relationship
between plaintiffs and defendants. Sacramento E.D.M., Inc. (“SacEDM”), a
specialized manufacturing company, began to experience financial trouble.
SacEDM’s owner, Dan Folk, formed a relationship with Dr. Michael Hynes, an
aviation and business expert. Initially, Hynes worked as a financial consultant for
Folk and SacEDM. Shortly thereafter, the parties formed a company called
“Oklahoma E.D.M.” (“OK EDM”) that existed solely to loan money to SacEDM
for operating expenses and buy SacEDM’s production. Through this joint venture,
Hynes and his two companies, Hynes Aviation Industries, Inc. (“HAI”) and Hynes
Children TF Limited (“Hynes Children”), (1) loaned SacEDM money for operating
expenses, (2) purchased SacEDM’s operating equipment and leased it back to
SacEDM, (3) purchased a bank-owned judgment against SacEDM, and (4)
purchased key man life insurance policies for both Hynes and Folk. These deals
**
The Honorable Robert L. Hinkle, United States District Judge for the
Northern District of Florida, sitting by designation.
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were designed to generate cash flow for SacEDM, helping it to continue
operations. These deals also had tax benefits for the parties and generated interest
for Hynes and his companies. Throughout this time, Hynes either directly acted as
a financial consultant to Folk and SacEDM or was considered a fiduciary with
regard to Folk and SacEDM by virtue of their partnership in OK EDM.
Despite the parties’ efforts, after several years, SacEDM was still failing as a
business. The relationship between Folk and Hynes soured, and the parties sued
each other. SacEDM and Folk (“plaintiffs”) sued Hynes and his companies in
Sacramento Superior Court under a variety of state law tort and contract theories,
including constructive fraud and breach of fiduciary duty. Hynes, HAI, and Hynes
Children (“defendants”) sued Folk and SacEDM in the Western District of
Missouri for breach of the loan and lease agreements.
The two cases were consolidated in the Eastern District of California before
Magistrate Judge Kendall J. Newman. Following a seven-day bench trial, the court
issued its findings of fact and conclusions of law, resolving all claims and
counterclaims. Both parties appealed.
We review the district court’s findings of fact following a bench trial for
clear error. See Kohler v. Presidio Int’l, Inc., 782 F.3d 1064, 1068 (9th Cir. 2015)
(citation omitted). “This standard is significantly deferential, and [the reviewing
court] will accept the lower court’s findings of fact unless [it is] left with the
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definite and firm conviction that a mistake has been committed.” Lentini v. Cal.
Ctr. for the Arts, Escondido, 370 F.3d 837, 843 (9th Cir. 2004) (citation omitted).
We review “de novo whether the district court used the correct legal
standard in computing damages.” United States v. Pend Oreille Cty. Pub. Util.
Dist. No. 1, 135 F.3d 602, 608 (9th Cir. 1998). We review the district court’s
computation of damages following a bench trial for clear error. Lentini, 370 F.3d at
843.
We have jurisdiction under 28 U.S.C. § 1291. For the reasons that follow,
we affirm in part and reverse in part:
1. “We review de novo the question of when a cause of action accrues
and whether a claim is barred by the statute of limitations.” Oja v. U.S. Army
Corps of Eng’rs, 440 F.3d 1122, 1127 (9th Cir. 2006). However, where accrual
turns on a question of fact or a mixed question of law and fact, such as what the
plaintiff knew or what a reasonable person should have known, we review for clear
error. Id. at 1135; see also Kingman Reef Atoll Invs., L.L.C. v. United States, 541
F.3d 1189, 1195 (9th Cir. 2008) (“When the accrual of the statute of limitations in
part turns on what a reasonable person should have known, we review this mixed
question of law and fact for clear error.”) (citation and internal quotation marks
omitted). Under this standard, we conclude that the district court did not err in
finding that plaintiffs’ claims for constructive fraud and breach of fiduciary duty
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were not barred by the statute of limitations. We affirm the district court’s
conclusion that a continuing violation exists, and therefore plaintiffs’ claims are
timely under §§ 338 and 343 of the California Code of Civil Procedure.
2. We affirm in part and reverse in part the district court’s findings and
conclusions regarding the equipment leases. We affirm the district court’s findings
that provisions of the leases—namely the interest rate and the lease periods—
worked to the detriment of SacEDM and the benefit of defendants, giving rise to a
breach of Hynes’s fiduciary duty and constructive fraud. We affirm the district
court’s finding that Hynes misrepresented the interest rate and duration of the
equipment leases. Moreover, the district court did not err in finding the equipment
leases were unconscionable. However, HAI was a lessor; it was not a lessee, and
therefore the lease’s no-assignment clause was not at issue. For this reason, we
affirm in part and reverse in part the district court’s findings with regard to the
equipment leases. We remand with instructions that the district court find that HAI
was a lessor, and determine damages accordingly.
3. The district court did not err in denying attorneys’ fees under the
equipment leases. Med. Protective Co. v. Pang, 740 F.3d 1279, 1282 (9th Cir.
2013). The leases did not contain a general attorneys’ fees provision; rather, the
leases contained three references to attorneys’ fees that are not applicable here.
DocMagic, Inc. v. Mortg. P’ship of Am., 729 F.3d 808, 812 (8th Cir. 2013) (stating
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that Missouri law requires courts to enforce binding attorneys fees provisions if a
contract so provides).
4. The district court did not err in concluding that Hynes breached his
fiduciary duty with regard to the US Banc Judgment; however, the court erred in
calculating damages. First, the district court thoroughly considered the evidence
regarding how Folk and SacEDM came to be responsible for paying the US Banc
Judgment. We find no clear error with the district court’s factual findings:
specifically, Hynes purchased the US Banc Judgment for $50,000 and then induced
Folk and SacEDM to repay the full amount of the judgment rather than the
purchase price. Lentini, 370 F.3d at 843. However, the court should have awarded
$223,000 rather than $251,000 based on the evidence presented regarding Joint
Exhibit 84. Therefore, we reverse and remand with instructions for the court to
award $223,000 with regard to the US Bank Judgment. Id.
5. We affirm the district court’s conclusion that the OK EDM business
structure provided significant business advantages to SacEDM such that Hynes did
not breach his fiduciary duties with regard to the creation of OK EDM or the
associated operating loans. Tribeca Cos., LLC v. First Am. Title Ins. Co., 192 Cal.
Rptr. 3d 354, 375 (Cal. Ct. App. 2015). Plaintiffs are therefore required to pay the
outstanding amount of principal and interest on the operating loans. We find that
the interest calculated by the district court is not usurious because it is less than the
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maximum interest rate allowed under California law. See Cal. Const. art. XV, §
1(2); see also Sheehy v. Franchise Tax Bd., 100 Cal. Rptr. 2d 760, 762 (Cal. Ct.
App. 2000).
6. The district court did not err in concluding that Folk was not jointly
liable for repayment of the operating loans and equipment leases. First, the district
court did not clearly err in finding that HAI and SacEDM withdrew from their
business relationship via a signed writing, thereby removing Folk’s liability under
a partnership theory. Filippo Indus., Inc. v. Sun Ins. Co. of N.Y., 88 Cal. Rptr. 2d
881 (Cal. App. 1999), as modified (Oct. 20, 1999) (“Whether a partnership or joint
venture exists is primarily a factual question to be determined by the trier of fact
from the evidence and inferences to be drawn therefrom.”). Second, we affirm the
district court’s conclusion that SacEDM was not an alter ego of Folk. Firstmark
Capital Corp. v. Hempel Fin. Corp., 859 F.2d 92, 94 (9th Cir. 1988). Finally, we
affirm the district court’s finding that SacEDM, not Folk, is liable under the
equipment leases.
7. The district court did not clearly err in finding that Hynes may retain
his consulting fees. See Lentini, 370 F.3d at 843.
8. We affirm the district court’s decision ordering SacEDM to pay the
remaining balance on the key man life insurance policies. The district court did
not clearly err in finding that the parties contracted for this arrangement. Id.7
Moreover, plaintiffs’ forfeiture argument—that plaintiffs are ordered to pay for
both the life insurance premiums and the outstanding balance of the operating
loans—is not borne out by record. As it stands now, proceeds from the life
insurance policy might still be used to pay the balance of the operating loans.
AFFIRM in part, REVERSE and REMAND in part. Each party shall
bear its own costs.
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