Reliance re. Ability to Create a Security Interest–Draper v. Cashner, LLC

Draper v. Cashner, LLC, 2014 WL 1051927 (Mo. Ct. App. E.D.), examines allegations of fraud in connection with a loan that was supposed to be secured by an LLC interest. However, the LLC agreement required unanimous consent to the creation of a security interest. The debtor’s brief states the following:

Douglas G. Draper and Charles C. Cashner testified that they expected the $1,000,000 loan to be short term. Tr. at 80- 86, 112-117. Draper admitted he received all of the stock purchased with the $1,000,000 loan with stock powers. Tr. at 88-89. In other words, he was completely secure under the agreement and, in addition, had claimed  interests in both Speed Lube LLC and Plant Maintenance Services LLC as additional security if needed. Tr. at 88-90. Draper could not recall what was said over the phone before he made the loan, see Tr. at 83-86, or the number of conversations he had concerning the loan. Tr. at 83-84. The transaction was casual, see Tr. at 84, because he trusted Cashner to pay him back. Tr. at 84-85. Draper was a member/manager of Speed Lube, LLC, but said he never read the operating agreement before making the loan. Tr. at 70-77. Cashner paid $432,340 to Draper on the notes. L.F. at 125; Tr. at 450-457. The interest rate on the June 24, 2002 note was modified on October 1, 2004 and the maturity was extended to June 30, 2006. Tr. at 53-54. On July 6, 2005, Douglas G. Draper made another loan of $250,000 to Cashner for additional stock which was also delivered to secure this note. Tr. at 87-88. The security agreement was not discussed at this time. Tr. at 92. Draper didn’t know one way or the other if interests in the limited liability companies could be pledged. Tr. at 91-92. He had access to the operating agreements for Speed Lube, LLC and Plant Maintenance Services, LLC. Tr. at 94. Not knowing what the documents stated, he trusted and relied on Cashner to determine if he could make the pledge. Tr. at 92. This is not reasonable reliance. Applying the elements of “fraud,” there was no evidence to support a finding of misrepresentation or reasonable reliance. The Judgment ignores the fact that Douglas G. Draper was a sophisticated businessman and an original member/manager of Speed Lube LLC.

Because Draper did not reasonably rely on any material misstatement of fact and did not prove the requisite elements of fraud, the Judgment for fraud should be reversed and set aside. Alternatively, should this Court find fraud, the judgment for fraud should be reversed because the lender has elected to enforce the notes and security agreement, which is inconsistent with the claim of fraud.

We are here interested in the last paragraph. The brief goes on and on, making it somewhat difficult to figure out exactly what was the nature of the alleged fraud. Additionally, after the lengthy discussion of facts, it merely provides a conclusion–reliance should not be considered reasonable or that there was not a misstatement of fact–without adequate discussion and analysis of supporting authority (other inapposite discussion above of Angelin Eng’g Co. v. Bay Co., 912 S.W.2d 633, 639 (Mo. Ct. App. 1995)).

There is a duty to read the particular contract in question. So, a claim alleging reliance on inaccurate statements concerning the import of a contract can be found not to be reasonable. Doctor’s Associates v. Stuart, 85 F.3d 975 (2d Cir. 1996), is illustrative. This author is not entirely convinced that the law should be so solicitous of the interests of those who are inclined to misstate the import of a contract being negotiated, as in Doctor’s Associates. Nevertheless, there is some authority for that proposition. However, insofar as a brief read of the brief correctly indicates the claim is that one cannot rely on alleged misstatement as to the import of some extrinsic writing, it is not clear why the aggressive view, of the type illustrated by Doctor’s Associates, should extend to extrinsic writings.

The discussion, also without authority directly addressing the matter, seems to indicate that a promise not to perform without the ability to perform is inadequate to give rise to promissory fraud. There is certainly some old authority to that effect:

A mere breach of a contract does not amount to a fraud, and neither a knowledge of inability to perform, nor an intention not to do so, would make the transaction fraudulent.

Miller v. Sutliff, 89 N.E. 651, 652 (Ill. 1909) (a case subject to subsequent exposition and development). Of course, a fraud claim, requiring scienter, would would be suspect here absent knowledge by the debtor of its inability to create the security interest. The brief is too cryptic to illuminate the pertinent facts to the casual reader. But, were there allegations of such knowledge, one would hope for collection of authority on the point.

Settling Terms Through Course of Performance–Hall v. Fox, 2014 WL 284530 (Mo. Ct. App., W.D.)

A dispute arises whether a contractor had an enforceable contract with a client.  judgment was entered for the contractor, who the brief reports claimed compensation on a time-and-materials basis. The client’s argument that the contract was for a fixed price was evidently rejected below.  We seem to have an issue of whether subsequent actions of the parties can cure an otherwise fatal indefinitness of the terms of their bargain, though the brief does not seem to capture this aspect of the case.

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Making a Useful Counterclaim–Gordon v. Heller

Gordon v. Heller, 2014 WL 462933 (Mo. Ct. App. E.D.), provides an interesting illustration of the desirability of making a counterclaim.

The case involves claims by a real estate agent, who also provided staging furniture, against the former client/homeowners.  As reported in the brief of the appellants/homeowners, following termination of the listing, the staging furniture remained for quite some time. The brief reports an evident judgment for the provider of staging furniture, although the brief challenges the existence of a pertinent contract.  It notes there was not a signed contract–the precise terms of any oral or implicit agreement as to terms are not detailed.

The brief does not discuss application of UCC Article 2A to the arrangements (e.g., Mo. Rev. Stat. 400.2A-201 (writing requirements)). Perhaps additional briefing will illuminate that choice.

For the moment, however, we can note the homeowners make an interesting argument. They sought in a counterclaim recovery for the value of having had their house used as a storage facility for the furniture. They allege the lessor undertook to remove the furniture but did not do so promptly. I look forward to seeing the respondent’s discussion of these issues.

 

Third-Party Beneficiaries of Municipal Contracts–More on Drury Co. v. Jackson R-2 School District

There does not appear to be an inherent inability at common law for an intended beneficiary to maintain a claim as a third-party beneficiary under a local government contract:

Whenever local law permits third-party beneficiaries to sue on contracts between others, they can sue on comparable local government contracts.

Chester James Antieau, Antieau on Local Government Law, § 32.12  (Sandra M. Stevenson, ed.) (2d ed., Lexis database, through December 2013; Release No. 126).  Were one to review 10A Eugene McQuillen, The Law of Municipal Corporations § 29:136 (3d ed. 2009 rev. vol), one would see, “The right of a third person to sue on a municipal contract has been denied in several decisions. However, in some circumstances such an action may be maintained ….”  McQuillen’s footnotes have such authority as referencing no recovery by an “incidental beneficiary” or “ordinarily, under New Mexico law, the obligations arising out of a contract are due only to those with whom it was made”.  So, without attempting to read each case cited by McQuillen, it would appear that Antieau has better-expressed the view.

Law Mo. Stat. 432.070 states:

No county, city, town, village, school township, school district or other municipal corporation shall make any contract, unless the same shall be within the scope of its powers or be expressly authorized by law, nor unless such contract be made upon a consideration wholly to be performed or executed subsequent to the making of the contract; and such contract, including the consideration, shall be in writing and dated when made, and shall be subscribed by the parties thereto, or their agents authorized by law and duly appointed and authorized in writing.

The school district in Drury Co. v. Jackson R-2 School District, 2014 WL 462916 (Mo. Ct. App., E.D. 2014), takes the position that the statute prevents third-party beneficiary claims against counties, etc.

An initial step in construing a provision, a statute as well as a contract, is ascertainment of the evident sense of the provision as a whole.  Let’s see if the argument is persuasive, particularly in regards to:

  • What particular language in the statute does the school district identify as the basis for holding third-party beneficiaries cannot enforce a written contract?
  • What statutory purposes does the school district identify that would be inhibited by allowing third-party beneficiaries to maintain actions?

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