United States District Court, D. Kansas
STANTON E. ROSS, Plaintiff/Counter, Defendant,
ADAM ROTHSTEIN, Defendant/Counterclaimant
Order Filed: December 23, 2014
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For Stanton E. Ross, Plaintiff, Counter Defendant: Adam J. Gasper, James F.B. Daniels, LEAD ATTORNEYS, McDowell, Rice, Smith & Buchanan, PC -- KC, Kansas City, MO USA.
For Adam Rothstein, Defendant, Counter Claimant: Neil L. Johnson, Nicholas L. DiVita, Sharon A. Stallbaumer, LEAD ATTORNEYS, Berkowitz Oliver Williams Shaw & Eisenbrandt, LLP - KCMO, Kansas City, MO USA.
MEMORANDUM AND ORDER
Daniel D. Crabtree, United States District Judge.
This matter comes before the Court on: (1) defendant's Motion for Summary Judgment on plaintiff's claim for wrongful disposition of collateral, defendant's right to a deficiency damages award, and defendant's entitlement to attorney's fees (Doc. 252); (2) plaintiff's Motion for Summary Judgment on plaintiff's claim for wrongful disposition of collateral under K.S.A. § § 84-9-624 and 84-9-626 and defendant's counterclaim for fraud in the inducement (Doc. 255); and (3) plaintiff's Motion in Limine excluding all facts, evidence, testimony, opinions, and inferences offered by defendant's proffered expert attorney Brian C. Underwood (Doc. 261). The Court referred all three motions to Magistrate Judge Teresa J. James for report and recommendation. On December 23, 2014, Judge James issued her Report and Recommendation (Doc. 283), recommending that the Court grant in part and deny in part plaintiff's Motion in Limine (Doc. 261), grant defendant's Motion for Summary Judgment (Doc. 252), and deny plaintiff's Motion for Summary Judgment (Doc. 255).
Plaintiff filed timely objections to the Report and Recommendation (Doc. 289). After considering plaintiff's objections and defendant's response, and having reviewed Judge James' well-reasoned Report and Recommendation, the Court overrules plaintiff's objections and adopts the Report and Recommendation of Judge James in its entirety.
I. Undisputed Facts
Judge James' Report and Recommendation (hereinafter, " Report" ) accurately sets forth the undisputed facts of the case. The Court briefly summarizes those facts here.
Plaintiff is a resident of Johnson County, Kansas, and currently the Chairman of the Board, President, Chief Executive Officer, and shareholder of Infinity Energy Resources, Inc. (" Infinity" ), a publicly traded company with its principal place of business in Johnson County, Kansas. Defendant is a Connecticut resident and currently the advisor to several funds concentrating in the technology, media, and entertainment sectors.
On March 30, 2012, defendant agreed to loan plaintiff $210,000 for 60 days. The terms of the loan were memorialized in a Secured Promissory Note and Pledge Agreement signed by the parties. The Secured Promissory Note required plaintiff to repay the loan in full within 60 days, on or before May 31, 2012, and to pay the interest on the loan by transferring to defendant 15,000 shares of Infinity stock.
Plaintiff failed to repay the loan by its due date of May 31, 2012. At plaintiff's request, the parties entered into a signed, written Forbearance Agreement on August 27, 2012. Under the Forbearance Agreement, among other things, (1) plaintiff reaffirmed all obligations under the Secured Promissory Note, (2) plaintiff acknowledged the default, and (3) defendant agreed to forbear from taking any remedial action on the Secured Promissory Note based on plaintiff's default until January 1, 2013. As consideration for the Forbearance Agreement, plaintiff agreed to deliver and transfer an additional 50,000 shares of Infinity common stock. When they executed the Forbearance Agreement, the parties entered into a (Superseding) Pledge Agreement in which plaintiff pledged 77,310 shares of Infinity common stock that he owned.
Plaintiff did not repay the loan on or before January 1, 2013, and his failure to repay the loan continues to date.
On January 30, 2013, plaintiff filed this lawsuit in the District Court of Johnson County, Kansas, and defendant removed the action to this Court. On September 9, 2013, Judge Lungstrum, the district judge then presiding over this case, granted summary judgment for defendant on his counterclaims for breach of the Secured Promissory Note, breach of the Forbearance Agreement, and breach of the (Superseding) Pledge Agreement and foreclosure of security interest (Doc. 54). Two days later, Judge Lungstrum entered judgment for defendant on defendant's three breach of contract claims in the total amount of $210,000, plus 18% default interest compounding monthly beginning September 5, 2012 (Doc. 56). Judge Lungstrum also ruled that defendant was entitled to obtain from the Clerk of the Court the original Infinity Energy Resources, Inc. Certificate No. 3287 representing 77,310 shares of Infinity common stock (Doc. 54).
On September 12, 2013, the Clerk of the Court released this stock certificate to defendant, which plaintiff previously had deposited with the Court (Docs. 52, 57). Four days later, defendant deposited the certificate for the 77,310 shares of Infinity common stock in an account with online broker Fidelity.com. He had established this account earlier in 2013, when he sold the 15,000 Infinity shares (that plaintiff had agreed to pay as interest on the loan) and the 50,000 Infinity shares (that plaintiff agreed to pay as additional consideration in the Forbearance Agreement) that defendant previously had received from plaintiff.
Defendant sold the 77,310 shares of Infinity common stock on September 16,
2013. He sold the shares in six different lots at prices ranging from $2.85 per share to $2.99 per share. After deducting brokerage fees and commissions, defendant realized $221,361.91 from the sale of the 77,310 shares.
Infinity's common stock trades on the Over-the-Counter QB Tier Market (" OTCQB" ) under the symbol " IFNY." Infinity's common stock was not publicly traded or sold on any other stock market in 2012, 2013, or anytime since.
On December 23, 2013, plaintiff filed an Amended Complaint asserting a claim against defendant for Wrongful Disposition of Collateral under K.S.A. § 84-9-625. This amendment relied on defendant's sale of the 77,310 shares of Infinity common stock (Doc. 117 at 10--11). Plaintiff alleges that defendant violated Kansas law by failing to give plaintiff notice of the impending sale and by selling the shares in a commercially unreasonable manner.
In July 2014, the parties filed cross-motions for summary judgment (Doc. 252, 255) and plaintiff filed a motion in limine to exclude the testimony of defendant's expert, Brian C. Underwood (Doc. 261). Defendant's motion seeks summary judgment against plaintiff's claim for wrongful disposition of collateral and in favor of defendant's right to deficiency damages and attorney's fees (Doc. 252). Plaintiff seeks summary judgment on his claim for wrongful disposition of collateral and against defendant's counterclaim for fraud in the inducement.
II. Report and Recommendation
The Court referred the motions to Judge James for a report and recommendation (Doc. 282). In the Report issued December 23, 2014 (Doc. 283), Judge James first recommended that the Court grant in part and deny in part plaintiff's motion in limine. Her Report concluded that though Mr. Underwood is qualified to testify as an expert under Fed.R.Evid. 702, he cannot testify about the four opinions in his affidavit because they are inadmissible legal conclusions. Judge James explained that Mr. Underwood cannot testify about legal opinions, he nonetheless may testify about factual issues that will help the Court decide legal issues. In making her recommendations on the cross-motions for summary judgment, Judge James determined that she could consider the factual statements in Mr. Underwood's affidavit " such as the operation, function, and trading of stocks on over-the-counter securities markets generally, as well as the OTCQB in particular and how it functions, operates, and how stocks trade on the OTCQB," as well as " the details of [defendant's] actual trades of the Infinity shares at issue." (Doc. 283 at 19-20) But Judge James' recommended rulings on the cross-motions for summary judgment nonetheless disregarded Mr. Underwood's legal opinions. ( Id. at 21)
Next, Judge James recommended that the Court grant defendant's motion for summary judgment for three reasons. First, Judge James recommended summary judgment against plaintiff's claim for wrongful disposition of collateral. She concluded that the undisputed facts establish that plaintiff waived his right to notice of defendant's sale of the 77,310 shares of Infinity common stock and also that defendant had sold the shares in a commercially reasonable manner. Second, Judge James recommended that the Court enter a deficiency damages determination and award for defendant, and if the Court adopted her Report, she recommended the Court set an evidentiary hearing to determine the amount of the deficiency judgment that plaintiff owes to defendant. Third, Judge James recommended that defendant is entitled to recover his reasonable out-of-pocket costs and expenses (including attorney's fees) because the (Superseding) Pledge Agreement requires plaintiff to pay
those costs and expenses. Judge James recommended that the Court determine the amount that defendant is entitled to recover after defendant complies with the fee application process established in Fed.R.Civ.P. 54(d)(2) and D. Kan. Rule 54.2.
Judge James then turned to plaintiff's motion for summary judgment. She recommended ruling against plaintiff's motion for summary judgment for two reasons. First, the same reasons that led her to recommend summary judgment for defendant against plaintiff's wrongful disposition of collateral claim also warranted summary judgment against plaintiff on this same claim. Namely, the undisputed facts establish plaintiff had waived his right to receive notice of defendant's sale of the stock and defendant had sold the stock in a commercially reasonable manner. Second, Judge James recommended summary judgment against defendant's counterclaim for fraud in the inducement because plaintiff filed his motion out of time and genuine factual issues exist that preclude summary judgment.
Plaintiff asserts thirteen objections to Judge James' Report. The Court addresses each objection below.
III. Standards of Review
Under Fed.R.Civ.P. 72(b)(2) and 28 U.S.C. § 636(b)(1)(C), a party may file specific, written objections to a magistrate judge's proposed findings and recommendations. When reviewing a magistrate judge's report and recommendation on a dispositive issue, the Court reviews de novo " those portions of the [magistrate's] report or specified proposed findings or recommendations to which objection is made." 28 U.S.C. § 636(b)(1)(C). This de novo review requires the Court to " consider relevant evidence of record and not merely review the magistrate judge's recommendation." In re Griego, 64 F.3d 580, 584 (10th Cir. 1995) (citation omitted). When performing this review, the Court " may accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions." Fed.R.Civ.P. 72(b)(3); see also 28 U.S.C. § 636(b).
The standard for deciding summary judgment is well-established. Summary judgment is appropriate if the moving party demonstrates that there is " no genuine dispute as to any material fact" and that he is " entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). When it applies this standard, the Court views the evidence and draws inferences in the light most favorable to the non-moving party. Nahno-Lopez v. Houser, 625 F.3d 1279, 1283 (10th Cir. 2010) (citing Oldenkamp v. United Am. Ins. Co., 619 F.3d 1243, 1245--46 (10th Cir. 2010)).
The Court applies this same standard to cross motions for summary judgment. Each party bears the burden of establishing that no genuine issue of material fact exists and entitlement to judgment as a matter of law. Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000). Cross motions for summary judgment " are to be treated separately; the denial of one does not require the grant of another." Buell Cabinet Co. v. Sudduth, 608 F.2d 431, 433 (10th Cir. 1979). But where the cross motions overlap, the Court may address the legal arguments together. Berges v. Standard Ins. Co., 704 F.Supp.2d 1149, 1155 (D. Kan. 2010) (citation omitted).
IV. Plaintiff's Objections
A. Objection No. 1 -- Plaintiff Objects that the Report Found True a Number of Facts Material to Defendant's Fraud in the Inducement Claim.
Plaintiff first objects to the Report's acceptance of several summary
judgment facts that are material to defendant's fraud in the inducement claim. By accepting those facts as true, plaintiff argues, Judge James ignored plaintiff's evidence controverting those facts and thereby engaged in an impermissible weighing of the summary judgment facts.
Plaintiff bases this objection on eight facts Judge James concluded were uncontroverted:
(1) During the parties' initial discussions about the loan, plaintiff said " it would be a very short term loan since his company, Infinity, was moments away from closing on a financing and the company owed him $300,000 in 'back pay.'" (Doc. 283 at 2--3)
(2) Plaintiff " assured [defendant] that he would be able to promptly repay the loan, stating that Infinity was near to closing on a financing from which the $300,000 in 'back pay' Infinity owed him would be funded." ( Id. at 3)
(3) " At no time during the conversations leading up to [defendant] agreeing to make the loan to [plaintiff] did [plaintiff] tell [defendant] there were substantial tax liens filed against [plaintiff] that would make any compensation payment to [plaintiff] from Infinity subject to being consumed by taxing authorities." ( Id.)
(4) " At no time during the conversations leading up to [defendant] agreeing to make the loan to [plaintiff] did [plaintiff] tell [defendant] that [defendant] was counting on Infinity entering into a business relationship with a drilling partner that would result in Infinity being able to fund his 'back pay.'" ( Id.)
(5) " At no time during the conversations leading up to [defendant] agreeing to make the loan to [plaintiff] did [plaintiff] state to [defendant] that [plaintiff] was counting on the value of Infinity's stock to rise, the sale of which would enable him to repay the loan." ( Id. at 4)
(6) " Before [defendant] funded the $210,000 loan to [plaintiff] on March 30, 2012, [defendant] was never told in any manner by [plaintiff] himself, or by Stephen Gans, or by any Digital Ally Board member, or by anyone else, that [plaintiff] had tax problems and tax liens filed against him." ( Id.)
(7) " At no time did Mr. [Stephen] Gans hear or otherwise learn from [plaintiff], from any other member of the Digital Ally Board, or from anyone else associated with Digital Ally, that [plaintiff] had problems with the IRS and tax liens filed against him." ( Id.)
(8) " [Plaintiff] did not repay the Loan on or before the forbearance extended due date, and his failure to repay the Loan continues to this date." ( Id. at 5)
Defendant set out each of these statements of fact in his Statement of Material Facts supporting his summary judgment motion (Doc. 254 at ¶ 7) or in his Statement of Additional Material Facts filed in response to plaintiff's summary judgment motion (Doc. 267 at ¶ ¶ 68, 70--73, 76, 79). He properly cited evidence in the record to support each of these factual statements. Plaintiff responded to defendant's statement of fact that " [Plaintiff] did not repay the Loan on or before the forbearance extended due date, and his failure to repay the Loan continues to this date" (No. 8 above) by stating that it was " undisputed." (Doc. 271 at ¶ 7) And plaintiff never responded to the other statements of fact (contained in defendant's Statement of Additional Material Facts in response to plaintiff's summary judgment motion (Doc.
as Fed.R.Civ.P. 56(c)(1) and D. Kan. Rule 56.1 require. Plaintiff did not controvert specifically defendant's Statement of Additional Material Facts in plaintiff's reply (Doc. 280) or in any other document filed with the Court. Thus, Judge James did not err when she accepted these eight facts as uncontroverted and included them in her findings of fact.
Plaintiff lists another 30 statements of fact that purportedly controvert the eight statements of fact described above and accepted by Judge James. Plaintiff asserts that Judge James ignored these 30 statements of fact, and, by doing so, she engaged in an impermissible weighing of the summary judgment facts. Plaintiff correctly stated that a court may not weigh competing facts at summary judgment under the well-established standard. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (" [A]t the summary judgment stage the judge's function is not [ ] to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." ).
Plaintiff included the 30 statements of fact (that he claims Judge James ignored) in his Statement of Uncontroverted Material Facts in support of his motion for summary judgment (Doc. 257). Defendant filed a Response to plaintiff's Statement of Uncontroverted Material Facts (Doc. 268). In Doc. 268, defendant responded to each of plaintiff's 30 factual statements by explaining that the majority of these facts either are immaterial, objectionable because they lack foundation or are hearsay, or controverted based on other evidence in the record. Plaintiff did not address defendant's objections to these 30 factual statements in his reply (Doc. 280) or in any filing with the Court.
In her Report, Judge James set out the statement of facts on which she based her recommendation and explained that these facts were " either uncontroverted, or, where controverted, are construed for summary judgment purposes in the light most favorable to the party opposing the summary judgment motion." (Doc. 283 at 2). She also made clear that " [i]mmaterial facts and factual averments not properly supported by the record are omitted" from her findings of fact. ( Id. at 2)
The Court has reviewed the factual record cited by plaintiff in support of these 30 factual statements and agrees with Judge James: these 30 factual statements are either immaterial or not supported by the record. Therefore, Judge James did not err by failing to include these factual statements in her findings of fact. Because the Report properly excluded these 30 factual statements from the findings of fact, the Court concludes Judge James did not weigh the summary judgment facts improperly. The Court therefore overrules plaintiff's first objection to the Report.
B. Objection No. 2 -- Plaintiff Objects that the Report Erroneously Admits the Factual Testimony of Defendant's Expert While Excluding His Opinions.
In the Report, Judge James recommended that the Court grant in part and deny in part plaintiff's motion in limine seeking to exclude all facts, evidence, testimony, opinions, and inferences offered by defendant's proffered expert attorney, Brian C. Underwood (Doc. 283 at 20--21). Judge James first determined that Mr. Underwood is qualified to testify as an
expert under Fed.R.Evid. 702. But having decided the threshold question of expertise, Judge James then concluded that Mr. Underwood cannot testify at trial about the four opinions in his affidavit because they are inadmissible legal conclusions. However, Judge James differentiated between these four legal opinions and factual issues that will assist the Court in deciding legal issues " such as the operation, function, and trading of stocks on over-the-counter securities markets generally, as well as the OTCQB in particular and how it functions, operates, and how stocks trade on the OTCQB," as well as " the details of [defendant's] actual trades of the Infinity shares at issue." ( Id. at 19--20) Plaintiff objects to the Report's recommendation for two reasons.
First, plaintiff objects that Mr. Underwood cannot testify as a fact witness about these facts because he lacks personal knowledge of the facts, as Fed.R.Evid. 602 requires. But Judge James did not recommend that the Court admit Mr. Underwood's testimony as fact witness testimony under Fed.R.Evid. 602. To the contrary, she determined that Mr. Underwood was qualified to testify as an expert under Fed.R.Evid. 702, which allows a " witness who is qualified as an expert by knowledge, skill, experience, training, or education [to] testify in the form of an opinion or otherwise." Fed.R.Evid. 702 (emphasis added). An expert witness may testify about facts at trial when the testimony " will help the trier of fact to understand the evidence or to determine a fact in issue." Fed.R.Evid. 702(a); see also Specht v. Jensen, 853 F.2d 805, 809--10 (10th Cir. 1988) (holding that expert witness may testify about specific questions of fact to aid the jury's understanding of the facts in evidence); Hartzler v. Wiley, 277 F.Supp.2d 1114, 1118 (D. Kan. 2003) (excluding expert's opinion testimony that amounted to legal conclusions but allowing expert to testify about facts and circumstances demonstrating the parties' intent in entering into an ambiguous contract).
Judge James' ruling left Mr. Underwood in a relatively uncommon position for an expert. The Report excluded all his opinions because they amounted to legal opinions--an expertise typically reserved for the Court. But Judge James concluded that Mr. Underwood still possessed other " knowledge, skill, experience, training, or education" that, in Her Honor's estimation, helped understand the evidence. Fed.R.Evid. 702. May an expert in this position still testify about the " non-opinion" aspects of the expert's " knowledge" or " experience" ? While plaintiff argues in his objections that Mr. Underwood cannot be permitted to testify about any " facts" that support his properly excluded opinions, plaintiff cites no authority for this argument. (Doc. 289 at ¶ 26, 32) In contrast, the available authority on this issue leads the Court to conclude that Judge James correctly considered Mr. Underwood's " knowledge" about and " experience" with " the operation, function, and trading of stocks on over-the-counter securities markets generally, as well as the OTCQB in particular . . . ." (Doc. 283 at 19--20)
As Judge James recognized, Rule 702(a) empowers a court to consider such evidence. " A witness who is qualified as an expert . . . may testify in the form of an opinion or otherwise if: (a) the expert's . . . other specialized knowledge will help the trier of fact . . . ." Fed.R.Evid. 702(a). The Rule's Advisory Committee Notes amplify this principle. " Most of the literature assumes that experts testify only in the form of opinions. The assumption is logically unfounded." Fed.R.Evid. 702 advisory committee's note (commenting on the 1972 proposed rules). And the case authorities also reject the idea that opinions are essential to an expert's currency. See United States v. Mulder, 273 F.3d 91, 102
(2d Cir. 2001) (holding that the government was " free to offer expert testimony . . . as background for an offense" ); see also Fisher v. Ciba Specialty Chems. Corp., No. 03-0566-WS-B, 2007 WL 2302470, at *2--3 (S.D. Ala. Aug. 8, 2007) (citing, among others, United States v. Lewis, 240 F.3d 866, 869--70 (10th Cir. 2001) (trial court properly admitted expert testimony to explain general requirements of Oklahoma law although expert offered no opinions whether that law applied to defendant)). Both Fisher and Lewis rejected motions seeking to exclude expert witnesses because they offered background information but no opinions.
Here, Judge James did not err by recommending that the Court admit Mr. Underwood's uncontroverted background information even though she had excluded his opinions. Her exclusion ruling did not nullify Mr. Underwood's qualifications. And Rule 702 permits a court to consider such testimony--here by Affidavit--as does the commentary of the advisory committee and the cases applying the rule.
Plaintiff also objects that defendant never disclosed Mr. Underwood as a fact witness. Defendant points out that plaintiff did not raise this argument in his original motion (Doc. 261), and, therefore, the Court should not consider it. Nevertheless, the Court reiterates that Judge James did not recommend that the Court treat Mr. Underwood as a fact witness but instead found Mr. Underwood qualified to testify as an expert about these factual issues. Defendant properly disclosed Mr. Underwood as an expert witness (Doc. 162), and thus plaintiff's argument that the Court should exclude Mr. Underwood's testimony for failing to disclose him lacks merit.
Next, plaintiff argues that Mr. Underwood's factual testimony is based on hearsay and therefore is inadmissible under Fed.R.Evid. 703, unless the evidence's probative value outweighs its prejudicial effect. Plaintiff argues, without specificity, that the facts which Mr. Underwood relies on " consist entirely of something he has read or heard" and thus constitute hearsay. (Doc. 289 at ¶ 34) The Court, however, has reviewed Mr. Underwood's affidavit (Doc. 253-3) and agrees with defendant: Mr. Underwood's affidavit provides sufficient foundation for his specialized knowledge about over-the-counter markets, including the OTCQB. The Court therefore overrules plaintiff's second objection to the Report.
C. Objection No. 3 -- Plaintiff Objects to the Report's Acceptance of Certain Factual Testimony Provided by Mr. Underwood That Plaintiff Claims Is Contradicted By Other Evidence in the Record.
Like the arguments made by his first objection, plaintiff argues that Judge James erred by accepting as true certain factual testimony of Mr. Underwood because other evidence in the record contradicts this factual testimony. By doing so, plaintiff argues, Judge James improperly weighed the evidence on summary judgment. The Court rejects this argument for several reasons.
First, plaintiff lists eight pieces of " factual testimony" that the Report purportedly " admits, credits and adopts" and this " in
some instances violat[es] the exclusion of rulings elsewhere in the Report." (Doc. 289 at ¶ 36 (noting, in particular, the Report's ruling that the Court cannot accept Mr. Underwood's legal conclusion that the OTCQB is a " recognized market" as defined under the Kansas Uniform Commercial Code)) The Court has reviewed the eight factual statements and finds that Judge James did not err by including them in her Report. Several of these statements address Mr. Underwood's qualifications to testify as an expert and Judge James' determination that he has the requisite skill, experience, and knowledge to testify as an expert about certain factual matters. The Court again has reviewed Mr. Underwood's education, training, and other professional background, as set out in his affidavit, and agrees with Judge James. Mr. Underwood is qualified to testify as an expert under Fed.R.Evid. 702.
The other statements include facts taken from Mr. Underwood's affidavit that describe the operation, function, and trading of stocks on over-the-counter securities markets, including the OTCQB. Defendant included some of these facts in his Statement of Material Facts in support of his summary judgment motion, citing Mr. Underwood's affidavit to support these facts (Doc. 254 at ¶ ¶ 31--39). Plaintiff responded that many of these facts were undisputed, or, where disputed, plaintiff failed to controvert the facts with admissible evidence in the summary judgment record (Doc. 271 at ¶ ¶ 31--39). Defendant presented additional factual testimony from Mr. Underwood's affidavit in his Statement of Additional Material Facts filed in response to plaintiff's summary judgment motion (Doc. 267 at ¶ ¶ 48--56). As explained above, plaintiff never responded to these factual statements--not in plaintiff's reply (Doc. 280) or in any other document filed with the Court. The Court thus concludes that Judge James did not err when she accepted Mr. Underwood's factual testimony as uncontroverted.
Second, plaintiff argues that Judge James erred by accepting a statement made in Mr. Underwood's affidavit that " the sale of Infinity shares traded on the OTCQB 'were sold in a recognized market at standardized prices; and that the sale of the shares [was] not the subject of individual negotiation.'" (Doc. 283 at 35 (quoting Mr. Underwood's Affidavit (Doc. 253-3 at ¶ 41)) Plaintiff contends that this statement of fact contradicts the Report's other ruling that it cannot accept Mr. Underwood's legal conclusion that the OTCQB is a " recognized market," as defined by the Kansas Uniform Commercial Code (" UCC" ). The Court disagrees. The Report never adopted Mr. Underwood's statement that the sale of Infinity shares traded on the OTCQB were sold in a recognized market at standardized prices. Instead, the Report just described what Mr. Underwood had stated in his affidavit; it did not make any explicit finding about his statement or accept it as true. ( Id.)
Reading further in the Report, Judge James again stated that she " rejects the ultimate conclusions offered by [Mr. Underwood]," but she found " that his factual statements and explanations support the conclusion that the Infinity shares at issue were sold at standardized prices and the sale of those shares was not subject to individual negotiation." ( Id. at 36) Judge James also noted that plaintiff had not offered any evidence to refute Mr. Underwood's statements that defendant's sale of the Infinity shares did not result from individually negotiated transactions. ( Id.) Based on this finding, Judge James rejected plaintiff's argument that the OTCQB was not a " recognized market" under the Kansas UCC because the share prices are subject to negotiation. Contrary to plaintiff's argument, Judge James did not accept Mr. Underwood's testimony that defendant's
sale of Infinity stock on the OTCQB was sold in a recognized market as the Kansas UCC defines that term. To the contrary, Judge James specifically rejected Mr. Underwood's legal conclusions. ( Id.)
Finally, plaintiff asserts that the Report ignored contrary evidence in the summary judgment record when it accepted Mr. Underwood's factual testimony as true. By ignoring that contradictory evidence, plaintiff argues, Judge James improperly weighed the summary judgment evidence and violated the established standard for deciding summary judgment. Plaintiff objects that Judge James ignored five types of evidence that contradicted Mr. Underwood's testimony.
First, plaintiff argues that Judge James erred by disregarding ten factual statements about the operation of the OTCQB. ( See Doc. 289 at ¶ 50(a)--(j)) On summary judgment, plaintiff supported each of these factual statements by reference to two screen prints from the OTC Markets Group website. Defendant objected to these website screen prints as inadmissible hearsay. Defendant also argued that even if the website screen prints were admissible, the information that they contained did not controvert facts establishing that the OTCQB operates as a stock market where fungible marketable securities are: (a) traded publicly; and (b) the securities' prices are determined primarily through standardized real-time price quotations and neutral market forces.
In the Report, Judge James explicitly addressed the website screen prints, questioning " the authenticity and admissibility of the statements contained" in them. (Doc. 283 at 33 (citing ColtTech LLC v. JLL Partners, Inc., 538 F.Supp.2d 1355, 1357 n.3 (D. Kan. 2008) (" For purposes of summary judgment, the court does not consider unsworn, unauthenticated documents, including printed copies of web sites." ))) And putting aside the admissibility of this evidence, the information from the website screen prints did not establish that the OTCQB differed from other " recognized" securities markets because the prices of securities traded on the OTCQB are individually negotiated, which, plaintiff argued, demonstrates that the Court should not consider the OTCQB as a " recognized market" under Kansas law. ( Id.) Judge James noted that one of the screen prints " actually states that investors in OTCQB marketplaces can buy and sell securities 'in a manner almost identical to that of trading NYSE or NASDAQ securities, through the broker of their choice (institutional, online, retail)'" and another of the screen prints " states that 'trading an OTCQX, OTCQB or OTC Pink security is comparable to trading a security on NYSE or NASDAQ. Investors may buy and sell securities through the institutional, online or retail broker-dealer of their choice.'" ( Id. (quoting Docs. 272-5, 272-6)) The second screen print also " provides a detailed explanation of the trading process for an individual investor." ( Id.)
The Court has reviewed the factual statements cited by plaintiff and agrees with Judge James. The admissibility of the screen prints used to support plaintiff's purported facts is questionable. The proffered evidence is hearsay, and, on summary judgment, plaintiff did not identify any hearsay exception that would allow the Court to consider this evidence. See Argo
v. Blue Cross and Blue Shield of Kan., Inc., 452 F.3d 1193, 1199 (10th Cir. 2006) (the content and substance of summary judgment evidence must be admissible at trial); see also Adams v. Am. Guar. & Liab. Ins. Co., 233 F.3d 1242, 1246 (10th Cir. 2000) (" Hearsay testimony that would be inadmissible at trial cannot be used to defeat a motion for summary judgment[.]" ). The Court also agrees that even if these facts were admissible, they do not establish that the OTCQB differs from other recognized markets because the prices of securities sold on the OTCQB are subject to individual negotiation.
Second, plaintiff argues that the Report improperly ignores certain factual statements taken from an August 17, 2007 letter sent to the Securities and Exchange Commission (" SEC" ) by Cromwell Coulson, who was then the CEO of Pink Sheets, LLC and now is the President of OTC Markets Group. In the summary judgment briefing, defendant objected to this letter because it contained hearsay, was not previously produced in the litigation, was not cited in plaintiff's First Amended Complaint, or identified in any Rule 26 disclosure. (Doc. 278 at 41--43) Defendant also objected that plaintiff neither had designated Mr. Coulson as an expert witness nor identified him as a fact witness under Rule 26. ( Id.)
Judge James did not refer specifically to this August 17, 2007 letter in her Report, but Judge James did announce that she had omitted all " factual averments not properly supported by the record." (Doc. 283 at 2) Plaintiff argues that this letter is a public document available for inspection on the SEC's website and the EDGAR system, but he cites no authority that would allow the Court to take judicial notice of this letter under Fed.R.Evid. 201. A court may take judicial notice of evidence " only if the facts in question are 'not subject to reasonable dispute; ' if, instead, they are 'capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.'" Lozano v. Ashcroft, 258 F.3d 1160, 1165 (10th Cir. 2001) (quoting Fed.R.Evid. 201(b) and citing United States v. Burch, 169 F.3d 666, 672 (10th Cir. 1999)). Plaintiff has failed to show that the contents of the August 17, 2007 letter are " not subject to reasonable dispute" or that they are " capable of accurate and ready determination" from sources " whose accuracy cannot reasonably be questioned." Thus, the Court declines to take judicial notice of this letter. Moreover, Judge James properly excluded the August 17, 2007 letter because it was inadmissible on summary judgment for all of the additional reasons asserted by defendant and described above.
Third, plaintiff asserts that Judge James erred by failing to consider facts from two screen prints purportedly taken from the OTC BB website. ( See Doc. 289 at ¶ 52) Like the other website screen
prints described above, defendant objected to the OTC BB website screen prints as inadmissible hearsay. Defendant also argued that even if the website screen prints were not hearsay, the information contained in them did not controvert facts cited by defendant describing the operation of the OTCQB. Again, the Report does not discuss the OTC BB website screen prints explicitly, but Judge James disregarded this information on summary judgment. The Court concludes that Judge James did not err by failing to consider these screen prints. For the same reasons discussed above, the information contained in these website screen prints is inadmissible hearsay, which the Court cannot consider on summary judgment. See Argo, 452 F.3d at 1199; see also Adams, 233 F.3d at 1246. The Court also agrees that, even if the facts contained in these website screen prints are admissible, they do not controvert the admissible and properly supported factual statements describing the OTCQB's operation cited by plaintiff.
Fourth, plaintiff objects that Judge James failed to consider certain statements contained in FINRA Rule 220.01 (Supplementary Material) which, plaintiff contends, shows that prices on the OTCQB are negotiable. On summary judgment, defendant objected to plaintiff's citation of this supplementary material because it is hearsay, misleading, incomplete, and lacks foundation. Defendant also pointed out that the rule's actual language (as opposed to the supplementary material) describes the OTC standardized price quotation system and the process that prevents member dealers from " backing away" from quotes, thereby controverting the selected statements cited by plaintiff in the supplemental material. (Doc. 278 at 40--41) The Court agrees with defendant. Plaintiff failed to establish that this supplemental material is admissible on summary judgment, and, even if admissible, it does not controvert other facts describing the OTCQB's price quotation system. Therefore, Judge James did not err by refusing to consider on summary judgment these certain statements contained in FINRA Rule 220.01 (Supplementary Material).
Fifth, plaintiff argues that Judge James erred by failing to consider statements made on an SEC website about the sale of OTC securities. Defendant again objected to these facts on summary judgment because plaintiff had failed to establish that information from this government website is admissible without a sponsoring witness or some other basis for admissibility. Defendant also objected that the information was incomplete and therefore misleading. Defendant cited other information from the website confirming that the OTC Link (the trading platform) facilitates trading on the OTCQB based on standardized price quotations, thereby contradicting the selected information cited by plaintiff trying to establish that OTCQB prices are subject to negotiation. Defendant also objected to the statement that the OTC Link provides subscribers the ability to send and receive trade messages, allowing them to communicate for the purpose of negotiating trades, as immaterial. Defendant argued no evidence exists showing that defendant had any such communications to negotiate the sale of shares at issue in this case and the evidence establishes that the sale was transacted electronically at then-prevailing market prices in the best bid/best offer process.
Judge James specifically considered the fact that the OTC Link allows communications and trade negotiations among broker-dealers for possible private transactions of common stock shares of a publicly traded company. (Doc. 283 at 35) But she disagreed that this feature required the Court to conclude that the OTCQB is not a " recognized market" under the Kansas
UCC. ( Id.) Judge James noted that private parties always have the ability to negotiate private transactions outside of a recognized market. ( Id.) Moreover, that kind of individual negotiation did not occur with the sale of shares at issue here. ( Id. at 36) Instead, Judge James determined that the undisputed facts establish that defendant's sale of the Infinity shares in this case was consistent with public trading on the NYSE. ( Id.)
The Court agrees with Judge James' consideration of the governing facts pertinent to the operation of the OTCQB. She did not weigh facts but, instead, considered the information as a whole in reaching certain conclusions about the operation of the OTCQB and, more specifically, about the sale of the Infinity shares on that market in this case.
Last, plaintiff asserts that Judge James erred by failing to consider 15 factual statements which, plaintiff claims, are admissions made in defendant's deposition that demonstrate that the OTCQB is not a " recognized market" under the UCC. (Doc. 289 at ¶ 55) On summary judgment, defendant objected to most of these factual statements because they were misleading or incomplete citations from defendant's deposition testimony about the OTCQB's operation. Defendant responded that certain testimony was uncontroverted to the extent defendant was testifying as a lay witness, but he also referred to more accurate, complete, and admissible facts about the OTCQB's operation as described by defendant's expert, Mr. Underwood. The Court agrees with defendant that plaintiff's purported facts rely on incomplete statements taken from defendant's deposition in which he was testifying about a topic only in a lay witness capacity and not as an expert. These factual statements do not controvert the other evidence cited by defendant describing the OTCQB's operation. Therefore, Judge James did not err by failing to consider these alleged admissions from defendant's deposition testimony.
For all these reasons, the Court concludes that Judge James properly considered the summary judgment record. Judge James did not weigh conflicting evidence. Instead, she determined correctly that the Court could not consider certain evidence--evidence that plaintiff contends contradicts Mr. Underwood's testimony--because plaintiff's proffered evidence is inadmissible, immaterial, or not supported by the summary judgment record. Thus, the Court overrules plaintiff's third objection to the Report.
D. Objection No. 4 -- Plaintiff Objects to Judge James' Questioning of the Authenticity and Admissibility of Website Screen Prints Proffered by Plaintiff.
As discussed above, plaintiff relied on several statements taken from screen shot prints off of the OTC Markets Group's website to controvert defendant's description of the OTCQB's operation. Judge James questioned the authenticity and admissibility of the screen prints from the OTC Markets Group Website. But she also concluded that, if they were admissible, the information did not establish that the OTCQB differs from other " recognized" securities markets because the prices of securities traded on the OTCQB are individually negotiated. (Doc. 283 at 33)
In his fourth objection, plaintiff argues that Judge James erred by questioning the authenticity and admissibility of this evidence. Plaintiff claims that this evidence is admissible and that Judge James erred by failing to consider it on summary judgment. The Court already has addressed the admissibility of the statements from this website above, concluding they are hearsay and not subject to the hearsay
exception in Fed.R.Evid. 801(d)(2)(B). The Court also rejects plaintiff's argument that defendant and his expert relied on statements from this same website. Instead, the record shows that defendant and his expert referred to statements from this website in response to plaintiff's citations to this website in his First Amended Complaint (Doc. 117).
More important to this objection, however, plaintiff ignores that Judge James did consider the evidence from the screen prints. Her Report specifically states, " [e]ven setting aside the admissibility of these screen prints, the Court finds the information in them does not support [plaintiff's] position that the OTCQB is distinguishable from other 'recognized' securities markets because the prices of OTCQB securities are individually negotiated, and therefore the OTCQB should not be considered a 'recognized market' under K.S.A. 84-9-627(b)(1) or (2)." ( Id. (emphasis added)) Judge James specifically referenced other statements in the screen prints that supported defendant's argument that the OTCQB operates in a manner comparable to trading a security on the NYSE or NASDAQ. Thus, Judge James concluded that the information in the screen prints failed to establish plaintiff's assertion that the OTCQB is different from other recognized markets. Judge James did not err in her consideration of this evidence.
E. Objection No. 5 -- Plaintiff Objects that the Report Failed to Require Defendant to Meet His Burden Under K.S.A. § 84-9-626 of Proving that the Collection, Enforcement, Disposition, and Acceptance of the Collateral Complied with Kansas Law.
K.S.A. § 84-9-626 applies to an action, like this one, that " aris[es] from a transaction in which the amount of a deficiency or surplus is in issue." The statute requires a secured party to bear the burden of establishing " that the collection, enforcement, disposition, or acceptance [of collateral] was conducted in accordance with [Part 6 of Kansas UCC Article 9, K.S.A. § § 84-9-601 through 628]." K.S.A. § 84-9-626(2). The statute also provides:
[I]f a secured party fails to prove that the collection, enforcement, disposition, or acceptance was conducted in accordance with [the statutory requirements], the liability of a debtor or a secondary obligor for a deficiency is limited to an amount by which the sum of the ...