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Brown v. K&L Tank Truck Service, Inc.

United States District Court, D. Kansas

September 1, 2017

John Brown and Barbara Brown, Plaintiff,
v.
K&L Tank Truck Service, Inc.; Alfonso Martinez; and Tom Herrell, Defendants.

          MEMORANDUM & ORDER

          John W. Lungstrum, United States District Judge

         Plaintiffs John and Barbara Brown filed this diversity suit against defendants asserting numerous claims arising out of the termination of the Browns' employment with defendant K&L Tank Truck Service, Inc. (K&L) and the sale of Mr. Brown's shares of K&L stock. This matter is now before the court on defendants' motion for partial summary judgment (doc. 67) in which defendants seek summary judgment on all but one of the claims asserted by plaintiffs. As will be explained, defendants' motion is granted in part and denied in part. The motion is denied as to plaintiffs' breach of contract and unjust enrichment claims and is otherwise granted.

         I. Facts

         The following facts are uncontroverted or related in the light most favorable to plaintiffs as the nonmoving parties. K&L Tank Truck Service, Inc. (K&L) is an oilfield services company in Garden City, Kansas. K&L primarily hauls water for oilfield drilling and operations. It is a Kansas “C” corporation for tax purposes. Plaintiffs John and Barbara Brown purchased K&L in the 1970s and continued to own it until they sold it to an Employee Stock Ownership Plan (ESOP) in the 1990s. When plaintiffs sold the last of their stock to the ESOP in 1998, they entered into written employment contracts with K&L for a three-year term. Pursuant to those contracts, John Brown acted as Operations Manager and Safety Director of K&L for a 12-month period and, for the remaining two years of the contract period, Mr. Brown acted only as the Safety Director. Barbara Brown acted as President of K&L for the three-year term. On August 23, 2001, the shareholders and directors of K&L held a joint annual meeting. As reflected in the minutes of that meeting, Ms. Brown announced that she and John Brown would be semi-retiring to Florida effective September 1, 2001. Following a discussion, K&L agreed to retain the Browns as consultants for a three-year period. In June 2004, the Board of Directors agreed to extend the Browns' contract as consultants through September 1, 2007. After that time, the minutes of the Board reflect no discussions about the Browns' continued employment and yet the Browns continued to remain employed by K&L until November 2013.

         In 2004, defendant Alfonso Martinez became the president of K&L. Prior to that time, Mr. Martinez had been the vice president of K&L as well as a director. During this same time frame, defendant Tom Herrell, also a director, became the vice president of K&L and plaintiff John Brown became a director. From 2004 through November 2013, K&L's Board of Directors consisted of Mr. Martinez, Mr. Herrell and Mr. Brown. In November 2004, Mssrs. Martinez, Herrell and Brown agreed to a plan to buy K&L back from the ESOP. As part of this plan, Mr. Martinez, according to Mr. Brown's testimony, asserted that he did not “want anybody to ever be able to fire” him. Mr. Brown, then, agreed that Mr. Martinez could purchase 60 percent of K&L's stock such that he would become the majority shareholder. Mr. Brown also agreed to guarantee the loan that K&L needed to buy its stock back from the ESOP. Partly in response to Mr. Martinez receiving a 60 percent share of K&L's stock, Mr. Brown made it clear to Mr. Martinez that, in exchange for his agreement to guarantee the loan, he wanted lifetime employment and health insurance coverage for himself and Ms. Brown. According to plaintiffs, Mr. Martinez agreed to Mr. Brown's request. Mr. Brown testified that he would not have guaranteed the loan without the agreement to lifetime employment and health insurance. While defendants dispute that any discussion concerning lifetime employment and insurance occurred between Mr. Brown and Mr. Martinez during this time period, they assume for purposes of their motion for summary judgment that a discussion regarding lifetime employment occurred. It is undisputed that no such agreement was ever brought to Mr. Herrell (the only other director) for approval.

         In mid-November 2004, Mr. Brown was elected as a trustee of the ESOP during a special meeting of the Board of Directors and, in late November 2004, the ESOP was terminated by K&L. While each ESOP participant had an election of whether to receive their distribution in shares of K&L stock or in cash (or partly in each), all the participants elected to receive their distribution in cash or in some form that enabled K&L to buy back 100% of the stock of K&L.[1]The sale was completed in early 2005 at a price determined by an appraisal. The appraisal determined that the K&L stock was worth $1714 per share for the 700 shares. Ultimately, K&L obtained a roughly $500, 000 loan secured by the assets of K&L and by one-third guarantees from Mssrs. Martinez, Herrell and Brown. Viewed in the light most favorable to plaintiffs, the evidence reflects that K&L would not have obtained the loan without Mr. Brown's guarantee in light of his financial position and his relationship with the bank. K&L paid the ESOP for the stock using the loan proceeds and some of its own funds. K&L then issued ten shares of stock to the new owners-six to Mr. Martinez; two to Mr. Herrell; and two to Mr. Brown-and was paid $1714 for each share for a total of $17, 140. The ownership of K&L remained the same from that time until November 2013. Under this new ownership, K&L experienced several profitable years of operation. K&L paid off the buy-back loan in full according to its terms and none of the guarantors were called on to pay any of the loan.

         More than two-thirds of K&L's business came from one customer-BP Amoco, which subsequently sold its southwest Kansas operations to Linn Energy in 2011. In 2013, Linn Energy required K&L to re-bid for its work and K&L lost that bid. While K&L did not lose all of its Linn Energy work through that bid, it is undisputed that it lost a substantial portion of its total work when it lost the Linn Energy bid. When the Browns came to Kansas from Florida in November 2013 for K&L's annual end-of-year meetings, Mr. Martinez told Mr. Brown that K&L could not afford the services of the Browns anymore because K&L was experiencing a financial crisis in light of the lost Linn Energy business. The record reflects that Mr. Martinez and Mr. Herrell had come to believe that K&L was “wasting its money” on the Browns' services. Ultimately, Mr. Brown sold his two shares of stock for a total price of $450, 000 and resigned as a director. The Browns were effectively terminated at the end of November 2013.

         Additional facts will be provided as they relate to the specific arguments raised by the parties in their submissions.

         II. Summary Judgment Standard

         “Summary judgment is appropriate if the pleadings, depositions, other discovery materials, and affidavits demonstrate the absence of a genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.” Water Pik, Inc. v. Med-Systems, Inc., 726 F.3d 1136, 1143 (10th Cir. 2013) (quotation omitted); see Fed. R. Civ. P. 56(a). A factual issue is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Water Pik, Inc., 726 F.3d at 1143 (quotation omitted). “The nonmoving party is entitled to all reasonable inferences from the record; but if the nonmovant bears the burden of persuasion on a claim at trial, summary judgment may be warranted if the movant points out a lack of evidence to support an essential element of that claim and the nonmovant cannot identify specific facts that would create a genuine issue.” Id. at 1143-44.

         III. Contract for Lifetime Employment

         In the pretrial order, plaintiffs set forth a breach of contract claim asserting that Mr. Martinez promised that K&L would employ the Browns and provide health insurance to the Browns for their lifetimes. While plaintiffs have not clearly articulated the contours of their breach of contract claim, the pretrial order together with plaintiffs' briefing on summary judgment indicates that plaintiffs are asserting two separate but related contracts. The first contract is one between John Brown (for himself and the benefit of Barbara Brown) and Mr. Martinez in his individual capacity in which Mr. Brown agreed to guarantee the loan and agreed that Mr. Martinez could purchase the majority of K&L's stock in exchange for Mr. Martinez's promise to cause K&L to provide lifetime employment to the Browns. The second contract is one between John Brown (for himself and the benefit of Barbara Brown) and the corporation, made by Mr. Martinez in his capacity as president of K&L, in which Mr. Brown promised to guarantee the loan in exchange for K&L's promise (via K&L's president) to employ the Browns for life. Defendants' motion for summary judgment is based on the assumption that plaintiffs are alleging only one contract-the one in which Mr. Martinez acts in his capacity as president of K&L. Thus, at a minimum, plaintiffs' claim that Mr. Martinez breached a contract in which he agreed (while wearing his individual “hat” as opposed to his president's “hat”) to cause K&L to provide lifetime employment to the Browns in exchange for the opportunity to purchase the majority of K&L's stock must be resolved at trial.

         The court turns, then, to plaintiffs' claim that Mr. Martinez, in his capacity as president of K&L and on behalf of K&L, agreed to provide lifetime employment to the Browns. Defendants move for summary judgment on the grounds that Mr. Martinez had no actual authority to bind the corporation to a lifetime employment contract. Defendants further contend that the unauthorized agreement was never ratified by the corporation. See Osborn v. Grego, 226 Kan. 212, 216 (1979) (an unauthorized act of an agent may be ratified by a principal, and when ratified is the equivalent of an original grant of authority). As will be explained, defendants have not shown that they are entitled to summary judgment on this claim. For even assuming that Mr. Martinez lacked actual authority to bind K&L to the lifetime employment contract, [2]factual questions exist as to whether Mr. Martinez had the apparent authority to do so-an issue which K&L addresses for the first time in its reply brief. Because a jury must resolve in the first instance whether Mr. Martinez had the apparent authority to bind K&L to the contract, the court declines to address at this juncture K&L's argument concerning ratification.

         Apparent authority can be created by appointing a person to a position . . . which carries with it generally recognized duties.” Restatement (Second) of Agency § 27 cmt. a (1958). “[T]o those who know of the appointment there is apparent authority to do the things ordinarily entrusted to one occupying such a position, regardless of unknown limitations which are imposed upon the particular agent.” Id. The question of an agent's apparent authority to bind his principal to a contract of lifetime employment has not been squarely addressed by Kansas courts. In Schiffelbein v. Sisters of Charity of Leavenworth, 190 Kan. 278, 279, 283 (1962), the Kansas Supreme Court held that the plaintiff alleged sufficient facts in his petition to survive a motion to dismiss where he alleged that he relied on the apparent authority of a hospital administrator who offered him lifetime employment in exchange for a promise not to sue the hospital for a work-related injury he sustained while employed at the hospital. The Court bypassed the apparent authority issue and concluded that the petition contained sufficient facts to support the conclusion that the hospital had ratified the administrator's act. Id. at 280-81. While the Court appeared to question whether the administrator had apparent authority to bind the hospital to a lifetime employment contract, see id., the Court cited to Townsend v. Missouri Pacific Railway Co., 88 Kan. 260 (1912) on the issue of apparent authority. In that case, the Court recognized that whether an agreement to give employment for an extended period (in that case, nine months) is within the apparent scope of authority of an agent is a question of fact. Townsend, 88 Kan. 260, 128 P.3d 389, 390 (1912). Moreover, the Tenth Circuit has held that in certain circumstances a high-level executive may have apparent authority to execute a lifetime employment contract. See Townsend v. Daniel, Mann, Johnson & Mendenhall, 196 F.3d 1140, 1146 (10th Cir. 1999) (jury could find that corporate vice-president, who was second in command only to the president, possessed apparent authority based upon the company's entrusting him with second-in-command responsibilities and his superior position vis-à-vis plaintiff, a vice president at the firm) (applying Colorado law).

         Based on the evidence in the record before the court, a jury could reasonably find that special circumstances exist in this case sufficient to conclude that Mr. Martinez had apparent authority to execute lifetime employment contracts with the Browns. To begin, the court notes that defendants do not challenge Mr. Martinez's authority to bind K&L to employment contracts generally-they challenge only the extent of the commitment that Mr. Martinez was authorized to make. And several key facts bear on the term of employment that Mr. Martinez might offer to the Browns-the Browns' extensive history with and knowledge of K&L; their age at the time of the alleged agreement (at least 60 years of age); the fact that they were employed as semi-retired consultants who presumably were not exercising executive discretion or managerial responsibility; and the fact that Mr. Brown was unwilling to guarantee the loan without the assurance of lifetime employment. In view of these circumstances, and defendants' failure to address the apparent authority issue in its opening brief, the court concludes that there is sufficient evidence of Mr. Martinez's apparent authority to justify submission of the issue to the jury. See Farmer v. Arabian American Oil Co., 277 F.2d 46, 52 (2d Cir. 1960) (recognizing special circumstances in which an agent may have apparent authority to execute a lifetime employment contract).

         The court addresses K&L remaining arguments in fairly short order. K&L asserts that any contract for lifetime employment is void or voidable by K&L on the grounds that it is an “interested director” contract under K.S.A. § 17-6304, which sets forth various means by which such contracts may be validated.[3] According to K&L, John Brown was acting as an interested director of K&L when he entered into a contract for lifetime employment. Given the nature of the promise made to Mr. Brown (lifetime employment for the Browns), the evidence viewed in the light most favorable to plaintiffs suggest that Mr. Brown was acting not as a director of K&L at the time of the alleged contract but as an employee of K&L at the time of the contract. It may be that defendants ultimately prove that Mr. Brown was wearing his director “hat” at the time promises were exchanged, but that issue is one for the jury to decide. Similarly, the court rejects the argument that Mr. Martinez cannot be held personally liable under the contract because Mr. Brown sought lifetime employment from K&L rather than Mr. Martinez. Factual issues exist concerning whether Mr. Martinez made the alleged promise of lifetime employment in his capacity as president of K&L (in which case K&L would be liable and not Mr. Martinez); in his capacity as an individual seeking to purchase the majority of K&L's stock (in which case he could be liable for failing to cause K&L to provide lifetime employment to the Browns); or in both capacities. Again, these are questions that must be resolved at trial.

         Finally, Mr. Martinez asserts that the statute of limitations has expired as to any breach of contract claim against Mr. Martinez. According to Mr. Martinez, any such contract was breached back in 2004 or 2005 when Mr. Martinez failed to obtain the Board's approval of the lifetime employment contract. This argument again assumes the existence of only one potential contract-a contract between Mr. Brown and Mr. Martinez as the president of K&L. But the record is sufficient to support the existence of a another contract-one between Mr. Brown and Mr. Martinez as an individual who promised to cause K&L to provide lifetime employment to the Browns. Under that scenario, Mr. Martinez was not required to obtain Board approval or ratification because K&L would not be liable to the Browns for any breach of the contract. The court, then, rejects Mr. Martinez's statute of limitations defense.

         IV. Purported Extension of 1998 Employment Contracts

         On August 1, 1998, K&L entered into written employment contracts with both plaintiffs. Those contracts expressly provided for a three-year term of employment, ending August 31, 2001. In the pretrial order, plaintiffs-as an alternative to their claim concerning lifetime employment-assert that the contracts were periodically “extended” by K&L beginning in 2001 such that the parties remained bound by the terms of the 1998 contracts (including an attorneys' fee provision) to the extent those provisions were not amended by the parties.[4] Plaintiffs, then, assert that defendants breached the terms of the 1998 contract by terminating plaintiffs' employment in November 2013. In their motion for summary judgment, defendants seek a determination that the 1998 contracts were not extended and that the terms of those contracts were not binding on defendants in November 2013. As will be explained, the court agrees with defendants and grants summary judgment on this issue.

         John Brown's 1998 employment contract established a “term” during which Mr. Brown acted as Operations Manager and Safety Director of K&L for a 12-month period at a salary of $72, 000 per year plus a discretionary bonus. For the remaining two years of the contract period, Mr. Brown acted only as the Safety Director at a salary of $14.400 per year. In addition, K&L agreed to reimburse Mr. Brown for all job-related expenses; to provide six (6) weeks paid vacation; and to provide health insurance during the term of the agreement. The contract expressly states that it extends “from the date hereof for a period of three (3) years and one (1) month ending August 31, 2001.” Barbara Brown's 1998 employment contract contained many of the same terms-including K&L's agreement to reimburse job-related expenses; to provide six (6) weeks paid vacation; and to provide health insurance. Ms. Brown's contract established a “term” during which Ms. Brown acted as President of K&L at a salary of $72, 000 per year plus a discretionary bonus. Like Mr. Brown's contract, Ms. Brown's contract expressly states that it extended “from the date hereof for a period of three (3) years and one (1) month ending August 31, 2001.”

         On August 23, 2001, the shareholders and directors of K&L held a joint annual meeting. As reflected in the minutes of that meeting, Ms. Brown “announced that she and John Brown would be semi-retiring effective September 1, 2001.” Following a discussion, K&L agreed to “retain John Brown and Barbara A. Brown as employees in the position of consultants for a period of three (3) years from and after September 1, 2001.” The minutes further reflect that K&L agreed to provide plaintiffs a computer, facsimile machine and copy machine for use in connection with their employment. With respect to compensation, K&L agreed to pay the Browns $800.00 per month “during the three (3) year term mentioned above” and to “furnish health insurance coverage to them.” In June 2004, the Board of Directors agreed to extend “John and Barbara's current contract as consultants through September 1, 2007.” After that time, the minutes of the Board reflect no discussions about the Browns' continued employment and Mr. Herrell could not recall ever discussing the Browns' continued employment after the June 2004 meeting.

         In the pretrial order, plaintiffs assert that K&L, beginning in 2001, extended plaintiffs' 1998 contracts such that the terms of those contracts remain in effect unless specifically amended by the parties. Defendants seek a determination that the 1998 contracts were not extended in 2001; that the 1998 contracts expired consistent with the terms of those contracts; and that the consulting arrangement that began in 2001 represented a new contract between the parties. Kansas law provides that the proper interpretation of a contract is a question of law for the court. Liggatt v. Employers Mutual Casualty Co., 273 Kan. 915, 927 (2002).[5] Whether a contract is ambiguous is also a question of law for the court. Clark v. Wallace County Cooperative Equity Exchange, 26 Kan.App.2d 463, 465 (1999). “If the contract is found to be unambiguous, the court must interpret the contract solely within its four corners, and extrinsic evidence is inadmissible.” Id.

         The court finds no ambiguity here and concludes that the original contracts terminated on August 31, 2001 and a new contract began on September 1, 2001. The minutes of the meeting discussing the consulting agreement make no mention of the 1998 written contracts or any of the terms contained in those contracts. Moreover, the consulting agreement was dramatically different than the prior agreement with respect to job positions and duties, compensation and the level of involvement with the company-with the Browns moving from an active status to a “semi-retired” one. There is nothing in the minutes of the 2001 meeting to suggest that K&L was extending the original agreements. And, as defendants highlight, this conclusion is buttressed by the minutes from the June 2004 meeting in which K&L expressly “extended” the Browns' “current contract as consultants” through September 1, 2007. Unlike the 2001 minutes, the 2004 minutes clearly extend the 2001 agreement.

         Plaintiffs' arguments in favor of finding an extension are not persuasive. Plaintiffs highlight that the Board in 2001 agreed to “retain” the Browns and assert that the word “retain” suggests a “continuation of the Browns' prior status.” But the Browns' prior status was as President and Operations Manager/Safety Director rather than as consultants. So, contrary to plaintiffs' argument, K&L was surely not continuing the Browns' prior status. Rather, it is clear that K&L agreed to “retain” the Browns as employees both in the sense that the Browns would remain on the payroll and that the Browns were being hired as consultants. See Black's Law Dictionary (10th ed. 2014) (defining “retain” as “To hire; to engage for the provision of services (as by a lawyer, an accountant, an employee, etc.).”).

         The court also rejects plaintiffs' argument that the 2001 agreement does not contain the “complete” agreement such that it is necessarily an extension of the 1998 agreement. Plaintiff directs the court to only two examples of “missing” terms in the 2001 agreement. First, plaintiff notes that the 2001 agreement does not describe plaintiffs' job duties. But plaintiff directs the court to no authority suggesting that such details are required to render an employment agreement “complete” and, in any event, it defies common sense to look to the 1998 agreement for such details when the 2001 agreement clearly and significantly changed the nature and scope of plaintiffs' job duties. Second, plaintiff asserts that the 2001 agreement does not address the reimbursement of job-related expenses but yet K&L continued to reimburse them for such expenses. K&L's reimbursement of such expenses, however, is not a function of the 1998 contracts but rather a function of a corporate policy under which K&L reimburses all employees for job-related expenses. Nothing about K&L's reimbursement of expenses, then, suggests that the 1998 contracts remained in place.

         In conclusion, the court sees nothing in the 2001 agreement that suggests an extension or modification of the 1998 contracts or the adoption or incorporation of any terms of the 1998 contracts. As a matter of law, the 1998 contracts expired consistent with their express terms and were not extended by K&L.

         V. Unjust Enrichment

         In the pretrial order, plaintiff John Brown asserts a claim of unjust enrichment against all defendants as an alternative to his breach of contract claim. To state a claim for unjust enrichment, plaintiff must prove: (1) a benefit conferred upon the defendant by the plaintiff; (2) the defendant retained the benefit; and (3) under the circumstances, the defendant's retention of the benefit is unjust. See Estate of Draper v. Bank of America, N.A., 288 Kan. 510, 534 (2009); see also Haz-Mat Response, Inc. v. Certified Waste Servs. Ltd., 259 Kan. 166, 177 (1996) (stating second element as “an appreciation or knowledge of the benefit by the defendant”).

         Defendants move for summary judgment on this claim. K&L asserts that summary judgment is appropriate because no reasonable jury could find that Mr. Brown conferred a benefit on K&L or that K&L had notice that Mr. Brown expected payment beyond what he had already received. Mr. Herrell moves for summary judgment on the grounds that no reasonable jury could conclude that he had notice that Mr. Brown expected payment beyond what he had already received. Mr. Martinez moves for summary judgment on the grounds that Mr. Brown did not expect to receive the benefit of lifetime employment from Mr. Martinez personally.[6]

         K&L asserts that Mr. Brown conferred no benefit on it because Mr. Brown's guarantee of the loan essentially reduced the value of K&L by over $480, 000. K&L provides no authority suggesting that the court should analyze the asserted benefit through the narrow lens utilized by K&L. Factual issues exist as to whether Mr. Brown conferred a benefit on K&L when he helped secure the loan (a loan that K&L could not have obtained otherwise) which permitted K&L to buy back ...


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