Jas Enterprises v. Bbs Enterprises , 835 N.W.2d 117 ( 2013 )

#26414, #26419-aff in pt, rev in pt & rem-GAS
2013 S.D. 54
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
JAS ENTERPRISES, INC.,
A SOUTH DAKOTA CORPORATION, Plaintiff and Appellant,
v.
BBS ENTERPRISES, INC., A
SOUTH DAKOTA CORPORATION,
BRADLEY STATON, BRIAN STATON,
and DANIEL STATON, Defendants, Third Party
Plaintiffs and Appellees,
v.
JAS ENTERPRISES, INC., A
SOUTH DAKOTA CORPORATION, and
JAMES SWABY, Third Party Defendants
and Appellants.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
****
THE HONORABLE JEFF W. DAVIS
Judge
****
JOHN K. NOONEY
ROBERT J. GALBRAITH of
Nooney Solay & Van Norman, LLP
Rapid City, South Dakota Attorneys for plaintiff, third
party defendants and
appellants.
STEVEN C. BEARDSLEY
MICHAEL S. BEARDSLEY of
Beardsley Jensen & Von Wald, Prof. LLC
Rapid City, South Dakota Attorneys for defendants, third
party plaintiffs and appellees.
****
ARGUED FEBRUARY 12, 2013
OPINION FILED 07/17/13
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SEVERSON, Justice
[¶1.] On January 27, 2000, JAS Enterprises, Inc. (JAS) entered into a
purchase agreement with BBS Enterprises, Inc. (BBS), which Bradley, Brian, and
Daniel Staton signed as personal guarantors. JAS sued BBS and the Statons for
breach of contract in February 2004. BBS and the Statons filed an answer and
counterclaim. A trial was held in March 2012, resulting in a judgment of $100,000
for BBS and the Statons and a judgment of $67,000 for JAS.
BACKGROUND
[¶2.] James Swaby is the principal shareholder of a company called
Equipment Service Professionals, Inc. (ESP), which installs and services a variety of
heating, air conditioning, and refrigeration systems, including ductwork, in
commercial and residential buildings. ESP operates out of two offices in South
Dakota, one in Rapid City and one in Spearfish. The Rapid City office is
incorporated as JAS Enterprises, Inc. (JAS), but it does business as ESP. Swaby is
also the principal shareholder of JAS.
[¶3.] Bradley and Brian Staton worked at ESP, installing sheet metal or
ductwork, and associated heating and air conditioning systems. Bradley began
working for ESP in 1992 and his brother, Brian, began working for ESP in 1993.
Both Statons began working for ESP out of the Spearfish office, but eventually
transfered to the Rapid City office. In 1999, Swaby and the Statons began
discussing whether the Statons were interested in purchasing the sheet metal
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installation portion of the business. 1 In November and December of 1999, the
Statons worked with an accounting firm in Rapid City to develop a business plan
and created a corporation called BBS Enterprises, Inc. (BBS) to purchase the sheet
metal installation portion of the business.
[¶4.] On January 27, 2000, BBS entered into a purchase agreement with
JAS only. Bradley, Brian, and Daniel Staton, Bradley and Brian’s father, signed
the purchase agreement as personal guarantors of the agreement. The purchase
agreement sold the vehicles, equipment, and inventory used in ESP’s sheet metal
installation business. The purchase agreement also sold JAS’s goodwill related to
the sheet metal business and contained a covenant not to compete, prohibiting JAS
from working in the sheet metal installation business for seven years within a one
hundred mile radius of Rapid City. 2 The total purchase price was $245,000, which
1. The parties dispute whether the “sheet metal installation” portion of the
business included only the sheet metal installation or the installation of sheet
metal and heating and air conditioning units. The purchase agreement used
the phrase “sheet metal installation.”
2. The text of the covenant not to compete, identifying JAS Enterprises, Inc. as
the Seller, states:
Recognizing Buyer’s need to protect their legitimate interest and
goodwill, and in the furtherance of the sale of the business assets
which includes the goodwill of the business being sold to Buyer,
Seller agrees that for a period of seven (7) years following the
Closing Date, Seller shall not alone or in combination with others,
directly or indirectly, and whether acting as a principal, agent,
employee, shareholder, director, partner or otherwise carry on, or
be engaged in, or connected with, the sheet metal installation
business within a geographical area of a one hundred (100) mile
radius of Rapid City, South Dakota.
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included $20,000 for the covenant not to compete and $58,000 for the goodwill of the
business.
[¶5.] At the same time, BBS entered into a business consultant agreement
with Swaby and an independent contractor’s agreement with JAS for bookkeeping
and secretarial services. BBS agreed to pay Swaby $1,250 per month for consulting
and $2,135 per month to JAS for bookkeeping and secretarial services.
[¶6.] After signing the agreements at the end of January 2000, BBS began
operating as Advance Heating and Air Conditioning. As early as March 2000, BBS
had trouble making timely monthly payments under the purchase agreement. At
various times over the next few years, ESP and JAS lent or advanced money to BBS
to help BBS complete various projects.
[¶7.] In February 2004, JAS filed suit against BBS and the Statons alleging
breach of contract on the purchase agreement. BBS and the Statons filed an
answer and counterclaim, arguing that (1) JAS and Swaby personally breached the
covenant not to compete, and (2) JAS and Swaby personally defrauded BBS and the
Statons. The Statons eventually identified seven different heating and air
conditioning installation projects that they alleged Swaby, JAS, or ESP worked on
in violation of the covenant not to compete.
[¶8.] A jury trial was held from March 28 through 30, 2012. At the close of
the trial, the jury found that the parties mutually assented to the essential terms of
the contract; that BBS and the Statons breached their obligation to JAS to make
payments as required by the purchase agreement; that JAS and Swaby breached
the covenant not to compete; that Swaby failed to give preference to BBS and the
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Statons by competing against them in the sheet metal installation business; and
that JAS and Swaby did not commit fraud or deceit. The jury awarded $67,000 to
JAS and Swaby for breach of the purchase agreement and $100,000 to BBS and the
Statons for breach of the covenant not to compete.
[¶9.] JAS and Swaby appeal the following issues: (1) whether BBS and
Statons’ counterclaim against Swaby personally should have been dismissed based
on a failure to obtain jurisdiction because a summons was never served on Swaby
personally and he was not identified as a third-party defendant; (2) whether the
trial court erred as a matter of law when it denied JAS’s motion for partial
summary judgment on the separate claims of fraud or deceit; and (3) whether the
trial court abused its discretion by admitting testimony from various witnesses at
trial.
[¶10.] BBS and the Statons appeal the following issues: (1) whether the trial
court erred in denying BBS and Statons’ motion for partial summary judgment on
the violation of the covenant not to compete and motion for directed verdict on the
covenant not to compete; (2) whether the trial court erred in denying prejudgment
interest to BBS and Statons; and (3) whether the trial court erred in answering a
question from the jury without giving either party notice or an opportunity to be
heard.
DISCUSSION
[¶11.] (1) Whether BBS and Statons’ counterclaim against Swaby
personally should have been dismissed based on a failure to
obtain jurisdiction because a summons was never served on
Swaby personally as a third-party defendant.
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[¶12.] “‘When a [third-party] defendant moves to dismiss for insufficient
service of process, the burden is on the [third-party] plaintiff to establish a prima
facie case that the service was proper.’” R.B.O. v. Priests of the Sacred Heart, 2011
S.D. 86, ¶ 7, 807 N.W.2d 808, 810 (quoting Grajczyk v. Tasca, 2006 S.D. 55, ¶ 22,
717 N.W.2d 624, 631). “Whether a [third-party] plaintiff has presented a prima
facie case of sufficient service of process is reviewed by this Court de novo, with no
deference given to the circuit court’s legal conclusions.” Id. (citing Grajczyk, 2006
S.D. 55, ¶ 22, 717 N.W.2d at 631).
[¶13.] “We have recognized that ‘proper service of process is no mere
technicality: that parties be notified of proceedings against them affecting their
legal interests is a “vital corollary” to due process and the right to be heard.’”
R.B.O., 2011 S.D. 86, ¶ 9, 807 N.W.2d at 810 (quoting Spade v. Branum, 2002 S.D.
43, ¶ 7, 643 N.W.2d 765, 768) (citations omitted). Service of process advises a party
that “‘a legal proceeding has been commenced’” and warns “‘those affected to appear
and respond to the claim.’” Id. (quoting Spade, 2002 S.D. 43, ¶ 7, 643 N.W.2d at
768). South Dakota statutes allow a defendant to bring a claim against a third-
party that is not a party to the original action. SDCL 15-6-14(a). SDCL 15-6-14(a)
provides, in part:
At any time after commencement of the action a defending
party, as a third-party plaintiff, may cause a summons and
complaint to be served upon a person not a party to the action
who is or may be liable to him for all or part of the plaintiff's
claim against him.
(Emphasis added.) If the third-party plaintiff serves the third-party complaint
within ten days of serving the original answer, the third-party plaintiff does not
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need the court’s permission to make a third-party complaint. Id. However, if the
third-party plaintiff does not serve the complaint within ten days, the third-party
plaintiff “must obtain leave on motion upon notice to all parties to the action.” Id.
If a plaintiff is suing a defendant personally, the summons must be delivered to the
defendant personally. SDCL 15-6-4(d)(8). If, as in this case, a third-party plaintiff
is suing a third-party defendant personally, the summons should be served on the
third-party defendant personally. See id.
[¶14.] Here, BBS and the Statons argue that they substantially complied
with the service of process so as to provide actual notice to Swaby via his attorney
that Swaby personally was being sued. In Wagner v. Truesdell, we defined
substantial compliance as:
“Substantial compliance” with a statute means actual
compliance in respect to the substance essential to every
reasonable objective of the statute. It means that a court should
determine whether the statute has been followed sufficiently so
as to carry out the intent for which it was adopted. Substantial
compliance with a statute is not shown unless it is made to
appear that the purpose of the statute is shown to have been
served. What constitutes substantial compliance with a statute
is a matter depending on the facts of each particular case.
1998 S.D. 9, ¶ 7, 574 N.W.2d 627, 629 (quoting State v. Bunnell, 324 N.W.2d 418,
420 (S.D. 1982) (internal citations and quotation marks omitted)). As we noted in
R.B.O., “‘[a]ctual notice will not subject [third-party] defendants to personal
jurisdiction absent substantial compliance with’ the governing service-of-process
statute.” 2011 S.D. 86, ¶ 17, 807 N.W.2d at 813 (quoting Wagner, 1998 S.D. 9, ¶ 9,
574 N.W.2d at 629).
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[¶15.] After JAS initiated this suit in 2004, BBS and the Statons filed an
answer and counterclaim with a certificate of service stating that the answer and
counterclaim were served on JAS’s attorney. Over three years later, BBS and the
Statons filed a summons requiring an answer to the answer and counterclaim. But
the summons did not state that Swaby was being sued personally and was not
delivered to Swaby. Finally, although an affidavit of service was filed stating that
Swaby was served the answer and counterclaim on April 26, 2007, Swaby was not
personally identified as a third-party defendant in the caption of the affidavit of
service or in the caption of the answer and counterclaim. Further, the affidavit of
service stated that an answer and counterclaim were served, but did not list a
summons as being served on Swaby.
[¶16.] BBS and the Statons, as third-party plaintiffs, did not serve a
summons and complaint within ten days of their answer. They did not obtain the
leave of the court to file a summons and complaint after the ten-day period expired.
They failed to serve Swaby personally with a summons and complaint at any point.
If BBS and the Statons meant to sue Swaby personally, they were required to
actually identify and properly serve Swaby. In this case, Swaby’s ownership of JAS
and process served on JAS does not substantially comply with personal service on
Swaby. BBS and the Statons failed to follow the procedures set out in SDCL 15-6-
14(a), and thus, the trial court should have granted the motion to dismiss the
counterclaim against Swaby personally.
[¶17.] In addition, if BBS and the Statons meant to assert a claim to pierce
the corporate veil of JAS to attach liability to Swaby, they should have made such a
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claim. 3 Swaby did not waive service of process under SDCL 15-6-12(h) because he
was never personally served with a third-party summons and complaint, and
because he was never served, Swaby is not party to this lawsuit. The trial court
erred when it denied Swaby’s motion to dismiss him personally.
[¶18.] (2) Whether the trial court erred as a matter of law when it
denied JAS’s motion for partial summary judgment on the
separate claims of fraud or deceit.
3. Our review of the record reveals that at a motions hearing prior to trial, the
trial court made the following statement regarding piercing the corporate
veil:
You know, and, frankly to the plaintiff all this stuff about JAS
being one and ESP being another and then Swaby being
separate ain’t going to fly either. I mean, GM can hide behind a
corporate veil. Small, closely held corporations cannot and I
won’t let it happen here so don’t even argue, other than to make
your record so you have it for appeal purposes.
However, we have consistently held that “[t]he general rule is that the
corporation is looked upon as a separate legal entity until there is sufficient
reason to the contrary.” Mobridge Cmty. Indus., Inc. v. Toure, Ltd., 273
N.W.2d 128, 132 (S.D. 1978). The corporate veil may be pierced “when
retention of the corporate fiction would ‘produce injustices and inequitable
consequences.’” Id. (quoting Hayes v. Sanitary & Improvement Dist. No. 194,
244 N.W.2d 505, 511 (Neb. 1976)). There are a number of factors that may
justify piercing the corporate veil, including: “(1) fraudulent
misrepresentation by corporation directors; (2) undercapitalization; (3) failure
to observe corporate formalities; (4) absence of corporate records; (5) payment
by the corporation of individual obligations; and (6) use of the corporation to
promote fraud, injustice or illegality.” Kan. Gas & Elec. Co. v. Ross, 521
N.W.2d 107, 112 n.6 (S.D. 1994). We also developed and discussed a two-part
test to evaluate when piercing the corporate veil is appropriate. See id. at
107.
In addition, we have specifically addressed the separate nature of Swaby,
ESP, and JAS in another case. See Equip. Serv. Prof’ls, Inc. v. Denowh, 2005
S.D. 20, 693 N.W.2d 54.
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[¶19.] JAS appeals the trial court’s decision to deny its motion for partial
summary judgment on the issue of fraud or deceit alleged in BBS and the Statons’
counterclaim. Importantly, the jury determined that JAS did not commit fraud or
deceit. Though JAS appeals the decision of the trial court to allow litigation of the
claim in the first place, we need not address this issue. Any future effort to
relitigate the claims of fraud or deceit against JAS is barred by res judicata. As we
determined in Black Hills Jewelry Mfg. Co. v. Felco Jewel Indus., Inc., “[r]es
judicata bars an attempt to relitigate a prior determined cause of action by the
parties, or one of the parties in privity, to a party in the earlier suit.” 336 N.W.2d
153, 157 (S.D. 1983) (citing Melbourn v. Benham, 292 N.W.2d 335, 337 (S.D. 1980)).
We do not require strict privity and previously held:
In deciding who are parties for the purpose of determining the
conclusiveness of prior judgments, “the courts look beyond the
nominal parties, and treat all those whose interests are involved
in the litigation and who conduct and control the action or
defense as real parties, and hold them concluded by any
judgment that may be rendered.”
Schell v. Walker, 305 N.W.2d 920, 922 (S.D. 1981) (quoting Keith v. Willers Truck
Serv., 64 S.D. 274, 266 N.W. 256, 258 (1936)). Based on the jury’s verdict and the
res judicata effect of that determination, we decline to address this issue further.
[¶20.] (3) Whether the trial court abused its discretion by admitting
testimony from various witnesses at trial.
[¶21.] “This Court reviews a decision to admit or deny evidence under the
abuse of discretion standard.” Ferebee v. Hobart, 2009 S.D. 102, ¶ 12, 776 N.W.2d
58, 62 (citing Fiechuk v. Wilson Trailer Co., Inc., 2009 S.D. 62, ¶ 8, 769 N.W.2d 843,
846). “This applies as well to rulings on motions in limine.” Id. (citing Dahlin v.
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Holmquist, 766 P.2d 239, 241 (Mont. 1988); Gray v. Allen, 677 S.E.2d 862, 865 (N.C.
Ct. App. 2009)). “With regard to the rules of evidence, abuse of discretion occurs
when a trial court misapplies a rule of evidence, not when it merely allows or
refuses questionable evidence.” State v. Asmussen, 2006 S.D. 37, ¶ 13, 713 N.W.2d
580, 586 (citing State v. Guthrie, 2001 S.D. 61, ¶ 30, 627 N.W.2d 401, 415).
[¶22.] Prior to trial, JAS filed fifteen motions in limine, fourteen of which
were denied. The fourteen motions that were denied all relate to testimony at trial.
JAS renewed its objections to the testimony of various witnesses at trial. On
appeal, JAS groups the testimony into six categories.
[¶23.] Testimony that Swaby personally or ESP violated the covenant not to
compete
[¶24.] “The court is to enforce and give effect to the unambiguous language
and terms of the contract[.]” Campion v. Parkview Apartments, 1999 S.D. 10, ¶ 25,
588 N.W.2d 897, 902 (quoting Production Credit Ass'n v. Wynne, 474 N.W.2d 735,
740 (S.D. 1991)). The purchase agreement at issue in this case and the covenant
not to compete within the purchase agreement refer to “Buyer” and “Seller.” The
agreement identifies the Buyer as BBS and the Seller as JAS. Swaby personally
and ESP, another company owned by Swaby, are not parties to the purchase
agreement or the covenant not to compete. This language is unambiguous and the
terms of the contract should be enforced as written. Notably, we have specifically
addressed the separate nature of ESP and JAS in a previous case. See Equip. Serv.
Prof’ls, Inc. v. Denowh, 2005 S.D. 20, 693 N.W.2d 54. We stated, “[i]t is improper to
ignore the separate corporate identity of these entities.” Id. ¶ 13, 693 N.W.2d at 58
(citing Fed. Land Bank of Omaha v. Mogck, 66 S.D. 514, 286 N.W. 322, 323 (1939)).
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JAS and ESP are separate corporate entities. ESP and Swaby personally are not
parties to the purchase agreement or the covenant not to compete. The trial court
erred by allowing testimony that ESP and Swaby personally violated the covenant
not to compete because it is irrelevant without a further showing that the seller,
JAS, as the contracting party, violated the covenant not to compete alone or with
others acting “as a principal, agent, employee, shareholder, director, [or] partner.”
Thus, admission of this testimony was an abuse of discretion.
[¶25.] Testimony that JAS and Swaby violated the business consultant
agreement
[¶26.] JAS’s complaint alleged that BBS and the Statons violated the
purchase agreement between BBS and JAS. In BBS and the Statons’ answer and
counterclaim against JAS, they alleged that JAS and Swaby violated the separate
business consultant agreement by competing against them. As noted above, BBS
and the Statons have never served a summons and complaint for their claims
against Swaby personally. JAS was not a party to the business consultant
agreement; Swaby personally was a party to the business consulting agreement.
Importantly, the business consultant agreement did not contain a covenant not to
compete. Again, Swaby is separate from the corporate entity of JAS. We cannot
ignore the terms of the purchase agreement and business consultant agreement and
the parties to those contracts. Thus, testimony regarding JAS’s breach of the
business consultant agreement was irrelevant because JAS was not a party to that
agreement and the agreement did not contain a covenant not to compete. The
admission of this testimony was an abuse of discretion.
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[¶27.] Testimony from Attorney Kurt E. Solay 4
[¶28.] Solay was subpoenaed by BBS and the Statons to testify because
Solay drafted the purchase agreement, the independent contractor agreement, and
the business consultant agreement. Solay was also present when the contracts
were signed. At trial, Solay was asked to interpret the contracts, including the
purchase agreement’s covenant not to compete, and offer his specialized knowledge.
However, “[t]he primary rule in the construction of contracts is that the court must,
if possible, ascertain and give effect to the mutual intention of the parties.”
Huffman v. Shevlin, 76 S.D. 84, 89, 72 N.W.2d 852, 855 (1955) (citations omitted)
(emphasis added). See also Weekley v. Weekley, 1999 S.D. 162, 604 N.W.2d 19;
Chord v. Pacer Corp., 326 N.W.2d 224 (S.D. 1982); Johnson v. Johnson, 291 N.W.2d
776 (S.D. 1980). Solay testified regarding his legal interpretation of the contract,
which is not appropriate because the interpretation of the unambiguous contract
should be supplied by the judge. Thus, the trial court abused its discretion in
admitting Solay’s testimony interpreting the contract.
[¶29.] Testimony regarding other litigation against Swaby or ESP
[¶30.] Relevant evidence is “evidence having any tendency to make the
existence of any fact that is of consequence to the determination of the action more
probable or less probable than it would be without the evidence.” SDCL 19-12-1
(Rule 401). In general, evidence of wrongs or acts other than those at issue in the
4. The issue whether it was appropriate for an attorney and partner in a law
firm to be called as an adverse witness to testify against the client his law
firm represented during the trial was not presented for review.
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case is not relevant or admissible to prove a person’s character. SDCL 19-12-5
(Rule 404(b)). However, evidence of other wrongs or acts may “be admissible for
other purposes, such as proof of motive, opportunity, intent, preparation, plan,
knowledge, identity, or absence of mistake or accident.” Id.
[¶31.] In this case, BBS and the Statons argue that evidence regarding other
lawsuits against Swaby show his intent to deceive. BBS and the Statons allege that
Swaby and JAS defrauded them. Intent to deceive is an element of fraud. SDCL
53-4-5. However, Swaby is not a party to this lawsuit and testimony regarding
lawsuits against him personally or against ESP are not relevant and do not show
the intent of JAS to defraud BBS and the Statons. Further, as discussed, the claims
for fraud or deceit by JAS were rejected by the jury.
[¶32.] Testimony regarding witnesses’ personal opinions that Swaby was
dishonest
[¶33.] In general, evidence of a person’s character or character trait is not
admissible except in certain circumstances. SDCL 19-12-4 (Rule 404(a)). The
credibility of a witness may be attacked in a limited way. See SDCL 19-14-9 (Rule
608(a)). South Dakota statutes provide:
The credibility of a witness may be attacked or supported by
evidence in the form of opinion or reputation, but subject to
these limitations:
(1) The evidence may refer only to character for truthfulness or
untruthfulness; and
(2) Evidence of truthful character is admissible only after the
character of the witness for truthfulness has been attacked by
opinion or reputation evidence or otherwise.
Id. This statute was adopted by Supreme Court Rule 78-2 in 1978. We have
subsequently held that witnesses may offer their opinion as to the character for
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truthfulness of another witness. See State v. Devall, 489 N.W.2d 371, 377 (S.D.
1992); State v. Tribitt, 327 N.W.2d 132, 135 (S.D. 1982). However, “[s]pecific
instances of the conduct of a witness, for the purpose of attacking or supporting his
credibility, other than conviction of crime as provided in §§ 19-14-12 to 19-14-16,
inclusive, may not be proved by extrinsic evidence.” SDCL 19-14-10 (Rule 608(b))
(emphasis added).
[¶34.] In this case, Bob Lochner, Keith Denowh, and Paul Schneider testified
about Swaby’s reputation in the community for being untruthful and about their
personal opinions as to whether Swaby’s character was truthful. This testimony
was properly admitted so that the jury might infer that Swaby was more or less
likely to be testifying truthfully. Then Lochner, Denowh, and Schneider testified
about the specific instances or circumstances that formed the basis for their
opinions that Swaby’s character was untruthful. Their testimony about the specific
instances that formed the bases of their opinions about Swaby’s character for
truthfulness was impermissible. Thus, the trial court abused its discretion in
admitting the testimony from Lochner, Denowh, and Schneider about the specific
instances that formed the bases of their opinions.
[¶35.] Testimony concerning conversations which occurred prior to the time
the contracts were signed
[¶36.] South Dakota statutes provide that “[t]he execution of a contract in
writing, whether the law requires it to be written or not, supersedes all the oral
negotiations or stipulations concerning its matter which preceded or accompanied
the execution of the instrument.” SDCL 53-8-5. “[P]arol evidence cannot be used to
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show the substance of the parties’ agreement absent an ambiguity.” Johnson v.
Coss, 2003 S.D. 86, ¶ 21, 667 N.W.2d 701, 708.
[¶37.] BBS and the Statons offered evidence regarding Swaby’s statements
about his intent not to comply with the covenant not to compete in the purchase
agreement. Again, Swaby was not party to the purchase agreement; JAS was the
seller in the purchase agreement. BBS and the Statons are not claiming fraud in
the inducement. In addition, the purchase agreement’s terms are unambiguous.
Thus, the trial court abused its discretion in admitting evidence regarding
negotiations or Swaby’s intent prior to the signing of the purchase agreement.
[¶38.] (4) Whether the trial court erred in denying BBS and Statons’
motion for partial summary judgment on the violation of the
covenant not to compete and motion for directed verdict 5 on
the covenant not to compete.
[¶39.] We review motions for summary judgment by determining “only
whether a genuine issue of material fact exists and whether the law was correctly
applied. If there exists any basis which supports the ruling of the trial court,
affirmance of a summary judgment is proper.” Jacobson v. Leisinger, 2008 S.D. 19,
¶ 24, 746 N.W.2d 739, 745 (quoting Cooper v. James, 2001 S.D. 59, ¶ 6, 627 N.W.2d
784, 787) (internal quotation marks omitted). Further, “[a] trial court’s ruling on a
motion for directed verdict is reviewed under the abuse of discretion standard.”
Harmon v. Washburn, 2008 S.D. 42, ¶ 8, 751 N.W.2d 297, 300 (citing Christenson v.
5. The parties and the trial court in this case refer to a motion for “directed
verdict.” However, a motion for “directed verdict” should now be referred to
and analyzed as a motion for “judgment as a matter of law.” SDCL 15-6-
50(a); 2006 S.D. Sess. Laws ch. 318 (Supreme Court Rule 06-44). See also
Harmon v. Washburn, 2008 S.D. 42, ¶ 10, 751 N.W.2d 297, 300.
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Bergeson, 2004 S.D. 113, ¶ 10, 688 N.W.2d 421, 425). “‘If sufficient evidence exists
so that reasonable minds could differ, a directed verdict is not appropriate.’” Id.
(quoting Christenson, 2004 S.D. 113, ¶ 22, 688 N.W.2d at 427).
[¶40.] South Dakota statutes provide:
Any person who sells the good will of a business may agree with
the buyer to refrain from carrying on a similar business within a
specified county, city, or other specified area, as long as the
buyer or person deriving title to the good will from the seller
carries on a like business within the specified geographical area.
SDCL 53-9-9. “What constitutes ‘a similar business’ is not further defined by
statute.” Franklin v. Forever Venture, Inc., 2005 S.D. 53, ¶ 12, 696 N.W.2d 545,
550. “However, based on the underlying purpose of statute, the offending activity
would need to be of a nature that detrimentally competes with the purchaser in
order to be considered a similar business. A California court required the business
or activity to be substantial, not ‘infrequent or isolated transactions.’” Id. (citing
Monogram Indus., Inc. v. Sar Indus., Inc., 134 Cal. Rptr. 714, 719 (Cal. Ct. App.
1976)).
[¶41.] As part of the purchase agreement between JAS and BBS, JAS agreed
to sell the goodwill of its sheet metal installation business to BBS and also agreed to
not to compete with BBS. The covenant not to compete provided:
Recognizing Buyer’s need to protect their legitimate interest and
goodwill, and in the furtherance of the sale of the business
assets which includes the goodwill of the business being sold to
Buyer, Seller agrees that for a period of seven (7) years following
the Closing Date, Seller shall not alone or in combination with
others, directly or indirectly, and whether acting as a principal,
agent, employee, shareholder, director, partner or otherwise
carry on, or be engaged in, or connected with, the sheet metal
installation business within a geographical area of a one
hundred (100) mile radius of Rapid City, South Dakota.
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[¶42.] BBS and the Statons assert that Swaby admitted to engaging in the
installation of seven heating and air conditioning units within the geographical area
and time period covered by the covenant not to compete. However, Swaby
personally was not a party to the purchase agreement containing the covenant not
to compete and is not an individual party to this lawsuit. Further, BBS and the
Statons failed to assert a claim to pierce the corporate veil of JAS to attach liability
to Swaby. In addition, BBS and the Statons’ claims focus on the installation of
heating and air conditioning units, but the purchase agreement and covenant not to
compete include only sheet metal installation, and do not refer to heating and air
conditioning installation. Factual issues exist as to whether sheet metal
installation includes the installation of heating and air conditioning units or just
the installation of sheet metal. Viewing the evidence in a light most favorable to
the nonmoving party, BBS and the Statons did not establish that there was no
genuine issue of material fact as to whether JAS violated the covenant not to
compete. Thus, the trial court did not abuse its discretion in denying the motion for
directed verdict (judgment as a matter of law) and it was appropriate to submit the
issue of whether JAS violated the covenant not to compete for consideration by the
jury.
[¶43.] (5) Whether the trial court erred in denying prejudgment
interest.
[¶44.] “Prejudgment [interest] calculations are done as a matter of law. As
such, the standard of review is de novo.” Dakota, Minn. & E. R.R. Corp. v. Acuity,
2006 S.D. 72, ¶ 26, 720 N.W.2d 655, 663 (citing City of Sioux Falls v. Johnson, 2001
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S.D. 108, ¶ 8, 632 N.W.2d 849, 852 ;City of Colton v. Schwebach, 1997 S.D. 4, ¶ 8,
557 N.W.2d 769, 771).
[¶45.] South Dakota statutes require an award of prejudgment interest on
compensatory damages, calculated “from the day that the loss or damage
occurred[.]” SDCL 21-1-13.1. “Prejudgment interest is now mandatory, not
discretionary.” Alvine v. Mercedes-Benz of North America, 2001 S.D. 3, ¶ 29, 620
N.W.2d 608, 614. SDCL 21-1-13.1 provides, in part:
If there is a question of fact as to when the loss or damage
occurred, prejudgment interest shall commence on the date
specified in the verdict or decision and shall run to, and include,
the date of the verdict or, if there is no verdict, the date the
judgment is entered. If necessary, special interrogatories shall
be submitted to the jury. Prejudgment interest on damages
arising from a contract shall be at the contract rate, if so
provided in the contract; otherwise, if prejudgment interest is
awarded, it shall be at the Category B rate of interest specified
in § 54-3-16. . . . The court shall compute and award the
interest provided in this section and shall include such interest
in the judgment in the same manner as it taxes costs.
In this case, the jury received instructions on awarding prejudgment interest and
special interrogatories to enable them to choose a date “when the loss or damage
occurred.” See SDCL 21-1-13.1. The jury awarded compensatory damages to both
JAS and BBS and the Statons, but the jury did not choose a date for the occurrence
of the loss or damage to either party. No prejudgment interest was awarded in this
case, although it is mandated by statute. See Bunkers v. Jacobson, 2002 S.D. 135, ¶
45, 653 N.W.2d 732, 744. Before entering the judgment, the trial court should have
required the jury to choose a date when the damage occurred to enable the trial
court to properly calculate prejudgment interest. Accordingly, we reverse and
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remand the issue of prejudgment interest to the trial court for determination of the
amounts owed on damages.
[¶46.] (6) Whether the trial court erred in answering a question from
the jury without giving either party notice or an opportunity
to be heard.
[¶47.] Until 2006, South Dakota statutes explicitly required a trial court “to
notify counsel and ‘settle in writing . . . a response to a jury question sent out by the
jury during deliberations.’” Duda v. Phatty McGees, Inc., 2008 S.D. 115, ¶ 21, 758
N.W.2d 754, 760 (quoting SDCL 15-6-51(c) (amended July 1, 2006)). Section 15-6-
51(c) was altered to follow Federal Rule of Civil Procedure 51. Duda, 2008 S.D. 115,
¶ 21, 758 N.W.2d at 760. As we noted in Duda,
[D]espite the fact that South Dakota rules no longer contain an
express requirement that a court inform the parties of jury
questions or that the questions be settled in writing, it is still
error even under the federal rule for a court to answer jury
instructions without giving the parties notice and an
opportunity to be heard.
Id. (citing Dunne v. Libbra, 448 F.3d 1024, 1028 (8th Cir. 2006); Murphy v. Tivoli
Enters., 953 F.2d 354, 360-61 (8th Cir. 1992)). “For such error to be reversible in a
civil case, however, prejudice must be established.” Id. (citing Dunne, 448 F.3d at
1028).
[¶48.] Here, during deliberations, the jury sent the following question to the
trial court:
#5 Fraud & Deceit-
Does this pertain to consultant contract & if so does it pertain to
time of signing the contract or does it mean for then the entire 7
years of the contract? Or does this pertain to all 3 contracts?
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The trial court responded to the question, without notifying either side in the
dispute:
You Must Determine The Facts From The Testimony And
Evidence Received In Open Court. The Law Is Contained In The
Instructions And You Must Apply That Law To Your Specific
Findings.
BBS and the Statons allege that the trial court’s failure to notify the parties and its
response resulted in the jury failing to award punitive damages. BBS and the
Statons state that the trial court should have referred the jury to the specific
instructions involving fraud and deceit, which were instructions 30, 31, and 32.
However, referring the jury to the jury instructions generally rather than three
instructions specifically does not demonstrate that BBS and the Statons were
prejudiced by the trial court’s response. BBS and the Statons fail to show why
referring the jurors to the jury instructions generally, rather than the three specific
instructions addressing the fraud or deceit claims, would make any difference in
this case. Though the trial court erred when it did not inform the parties about the
question, BBS and the Statons fail to demonstrate that their substantive rights
were adversely affected.
CONCLUSION
[¶49.] As to the issues appealed by JAS, the trial court erred when it denied
Swaby’s motion to dismiss based on a failure to obtain jurisdiction because Swaby
was never personally served with a third-party summons and complaint. We
decline to address whether the trial court should have granted JAS’s motion for
partial summary judgment because the jury determined that there was no fraud or
deceit and the res judicata effect of that determination. The trial court abused its
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discretion in allowing testimony that JAS violated the business consultant
agreement because JAS was not a party to the agreement. The trial court also
abused its discretion in admitting the testimony of Solay interpreting the contract.
In addition, the trial court abused its discretion in admitting the testimony from
Lochner, Denowh, and Schneider regarding extrinsic evidence that formed the bases
of their opinions regarding Swaby’s character for truthfulness. Finally, the trial
court abused its discretion in admitting parol evidence as the contract was
unambiguous and no claim was made for fraud in the inducement.
[¶50.] As to the issues appealed by BBS and the Statons, the trial court did
not abuse its discretion in denying BBS and the Statons’ motion for directed verdict
(judgment as a matter of law). It was appropriate to submit the issue whether JAS
violated the covenant not to compete to the jury for consideration, but it was error
to include Swaby personally. We reverse and remand the issue of damages on the
counterclaim against JAS for breach of the covenant not to compete and the issue of
prejudgment interest to the trial court for determination of the amount of interest
owed. The trial court erred by failing to inform the parties about the question from
the jury, but BBS and the Statons failed to demonstrate that their substantive
rights were adversely affected.
[¶51.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER and
WILBUR, Justices, concur.
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