County District Court File No. 27-CV-14-15139
Christopher P. Parrington, Andrew R. Shedlock, Kutak Rock,
LLP, Minneapolis, Minnesota (for appellant)
J. Cragg, Vince C. Reuter, Gregory L. Singleton, Eckland
& Blando LLP, Minneapolis, Minnesota (for respondents)
Considered and decided by Cleary, Chief Judge; Ross, Judge;
and Rodenberg, Judge.
determining the meaning of ambiguous terms in a non-adhesion
contract, a factfinder may construe such ambiguous terms
against the contract drafter only if the mutual intent of the
parties cannot be determined from the evidence.
CLEARY, CHIEF JUDGE.
appeal from a judgment in favor of appellant Staffing
Specifix, Inc. (Staffing) following a jury trial on its
breach-of-contract, fraud-in-the-inducement, and defamation
claims, Staffing asserts that the district court erred by (1)
dismissing its claim of conversion on summary judgment, (2)
dismissing its claim of civil theft on summary judgment, (3)
denying its motion to amend to add a statutory claim for
unpaid commissions, (4) denying its motion to amend to add a
claim for punitive damages, and (5) awarding costs and
disbursements to certain respondents.
notice of related appeal, respondents assert that the
district court erred in (1) instructing the jury on the
breach-of-contract claim, (2) allowing the admission of
improper character evidence, and (3) awarding costs and
disbursements to Staffing based on a record not before the
district court administrator.
affirm the district court's orders (1) dismissing
Staffing's claims of conversion and civil theft, (2)
denying Staffing's motion to amend to add a statutory
claim for unpaid commissions, and (3) awarding costs and
disbursements. We do not address the denial of the motion to
add a claim for punitive damages as Staffing did not move for
a new trial below. However, because the district court's
jury instructions on the breach-of-contract claim materially
misstated the law resulting in substantial prejudice to
respondents' case, we reverse and remand. We also
conclude that the district court erred in admitting improper
is a temporary staffing agency based in Florida owned by
Margarita Lermo and run by her son, Alexander Fernandez, who
is the CEO. Respondents include a group of family-owned
companies-TempWorks Software, Inc., ARA, Inc., and TempWorks
Management Services, Inc. (TMS)-as well as the companies'
owners and corporate officers. Respondent David Dourgarian is
the CEO of the three companies. TempWorks Software provides
software for staffing agencies to track temporary workers and
businesses requiring workers. ARA provides payroll funding
for staffing companies. Respondents describe TMS as a
staffing agency "incubator, " whereby TMS contracts
with smaller staffing agencies that recruit and match
temporary workers with businesses. While the smaller staffing
companies build their businesses by recruiting and placing
temporary workers at jobs, TMS and its sister companies act
as the employer of record, offer payroll services, and
provide for the smaller staffing companies' payroll
funding and software needs. Respondents explained at trial
that TMS profits from management fees that it charges
staffing companies and a "buyout fee" that the
incubated company must pay when it "graduates" and
becomes independent enough to fund its own payroll.
began doing business with TempWorks Software and ARA in 2011
to obtain software and payroll funding of its temporary
workers needing to be paid on a weekly basis while payments
from customers using the workers were still pending.
Staffing's CEO, Fernandez, testified at trial that he was
responsible for negotiating contracts for the company. He
testified that typically when entering into a contract, he
and Lermo, the owner of Staffing, would read and discuss the
contract. If Lermo had questions that Fernandez could not
answer, Fernandez would seek clarification.
December 2012, Staffing negotiated a new contract with TMS.
After Fernandez and Lermo examined the initial draft of the
contract, which was drafted by TMS, Staffing requested
certain changes to the contract. TMS accepted the changes and
they were adopted in the final agreement. In late 2012,
Staffing and TMS executed the contract called the "TMS
the TMS services agreement, TMS took over as the employer of
record and Staffing continued to receive payroll funding and
software support. Under the contract, Staffing became a
"limited [c]ustomer services agent of [TMS]"
whereby Staffing would recruit temporary workers (called
"staffed consultants" in the contract) to perform
work for businesses (called "customers" in the
contract). Under section 3.6 of the contract, Staffing would
earn a commission, which was calculated by taking the
accounts receivable from invoices paid in full by customers
each week, and subtracting TMS's "management
fees" and other amounts chargeable to Staffing. Section
3.5 defines "management fees" as including, inter
alia, the "total cost of payroll, " and an
administrative fee of 2.95 percent of the gross amount of
weekly invoices. Section 4.1 provides that TMS, as the
employer of the temporary workers, will "maintain,
administer and pay for workers' compensation
insurance." Section 7.2 provides that TMS is responsible
to pay for workers' compensation costs of all the
14.1 states that the initial term of the TMS services
agreement is a fixed term of 18 months, and the contract will
automatically renew in 12-month increments, "unless
sooner terminated under Article 11, or the mutual, written
consent of the parties." Section 11.1 generally allows
Staffing to terminate the contract only with the written
consent of TMS, and TMS to terminate at any time after the
initial term has expired. Section 11.2 provides that, after
the first year of the contract, Staffing may terminate by
paying a "buy out, " which is defined as two times
the total management fees that TMS earned in the preceding
year, less actual costs of payroll. Section 11.3 allows TMS
to terminate on the occurrence of a material breach and lists
the events of default. The contract also provides TMS with a
security interest in Staffing's business, including its
assets, accounts receivable, and computer records.
negotiations of the contract, TMS quoted a set of
workers' compensation rates for Fernandez before Staffing
entered into the contract. During the performance of the
contract, Fernandez understood that TMS subtracted
workers' compensation insurance costs from Staffing's
commission. Staffing was to receive weekly commissions under
the contract but by its own choice Staffing held a
"carry-forward balance" of its commission with TMS,
and it would periodically request a release of funds.
29, 2014, Fernandez notified TMS that Staffing did not want
to renew the contract after the 18-month term expired that
summer. Dourgarian thought that Staffing was terminating the
contract and that, under section 11.2 of the contract,
Staffing owed TMS a buyout fee. After some dispute, at the
end of July 2014, TMS and Staffing ultimately negotiated a
separate buyout deal that included a discounted $65, 000
buyout fee with a continued software- and payroll-services
agreement for three years, in exchange for the ability of
Staffing to exit the TMS services agreement. According to
Dourgarian, the deal was contingent on a payoff agreement
between Staffing and a third-party funder to buy out all of
the accounts receivable on TMS's books from invoices due
early August 2014, TMS withheld the $65, 000 buyout fee from
Staffing's carry-forward balance without the final payoff
agreement going forward. Dourgarian understood that the
buyout fee was an "up front" payment. Fernandez
objected to TMS withholding the $65, 000 from Staffing's
carry-forward balance before the payoff agreement was
finalized. Because of Fernandez's objection, Dourgarian
said the deal was off but he did not return the $65, 000 to
Staffing's balance. The deal was put back on the table
August 6, 2014, TMS notified Staffing that it would deduct
around $71, 000 from Staffing's carry-forward balance to
offset costs that TMS claims it incurred because it
undercharged Staffing for workers' compensation. By
August 7, 2014, that amount had been subtracted from
Staffing's carry-forward balance. That same day,
Dourgarian spoke with a sales representative from Advance
Payroll Funding (Advance), the company Staffing asked to fund
the payoff of the accounts receivable. According to
Dourgarian, the sales representative told him that Fernandez
had a felony record, and Dourgarian believed that the deal
with Advance would not happen. Fernandez did not dispute he
was convicted of a felony. On or around August 12, Advance
told Dourgarian it would not fund Staffing's buyout.
Dourgarian said that he was willing to honor the $65, 000
buyout agreement until August 15.
August of 2014, the accounts receivable on TMS's books
from Staffing's business with customers were over one
million dollars. This was due to the fact that Staffing had a
spike in business and was increasingly supplying an
international shipping company, Senator International
(Senator), with temporary workers, creating greater invoices
owed to TMS. According to Dourgarian, he became worried about
TMS's exposure to Senator's unpaid invoices.
Dourgarian traveled to Florida to investigate the situation
at Senator and was satisfied after speaking with people
representing the company.
September 11, 2014, TMS declared that Staffing was in default
of the TMS services agreement because Fernandez
misrepresented Staffing's ownership, Fernandez was the
true owner, and Fernandez had a felony record.
sent two TMS officers, Doug Greene and Mari Kautzman, to
Florida to open an office and "repossess"
Staffing's business assets, including Staffing's
customer relationships. TMS shut down Staffing's access
to TempWorks Software applications, and stopped direct
deposits to Staffing's temporary workers. Dourgarian said
he instructed Greene and Kautzman to visit Staffing's
customers with open accounts receivable with TMS, including
Senator. Greene and Kautzman delivered paper paychecks, which
were given to the temporary workers. Inside the check
envelopes was a letter that told the temporary workers:
"We are pleased to announce that as of September 11th,
2014, we will be doing business under a new name, TMS
Staffing." The letter informed the temporary workers of
TMS's new Miami office.
trial, Dourgarian admitted that he told Greene and Kautzman
to tell Senator that Staffing's real owner was Fernandez
and that Fernandez had a felony record, thereby implying that
Staffing is owned by a criminal. Dourgarian testified that
Greene and Kautzman reported back to him that they
communicated this message. At trial, both Greene and Kautzman
denied that they did so.
September 30, 2014, Staffing and TMS entered into a final
contract to terminate the TMS services agreement. The new
contract, drafted by TMS, called for a company called Tricom
to pay around $1.2 million to purchase the accounts
receivable. The approximate $1.2 million amount represented
90 percent of the total aging balance of TMS's accounts
receivable "plus fees earned by TMS."
Dourgarian's view at trial was that Staffing had
terminated the TMS services agreement and the "fees
earned" included a buyout fee in section 11.2 of that
contract. Dourgarian testified that the buyout fee at that
point was $280, 000, and the $65, 000 already moved out of
Staffing's carry-forward balance would be subtracted from
that amount. The deal also included paying Staffing all
commission owed to it. Fernandez testified that his
understanding of the Tricom buyout agreement was that it was
a termination with TMS's consent and, under section 11.1
of the TMS services agreement, a buyout fee was never owed.
August 29, 2014, before the Tricom agreement was executed,
Staffing filed a lawsuit in district court. Relevant to this
appeal, Staffing sued TMS for breach of contract, fraud in
the inducement, conversion, and civil theft. On September 17,
2014, the district court partially granted Staffing's
motion for a temporary restraining order and ordered TMS to
restore all software access and functionality to Staffing.
Staffing amended its complaint and sued TMS, Dourgarian, John
Reid (TMS's general counsel), Kautzman (TMS's chief
operating officer) and Greene (CEO of the TMS office in Ohio)
for defamation per se. In response, TMS brought
breach-of-contract counterclaims against Staffing.
August 6, 2015, after cross motions for summary judgment, the
district court denied Staffing's motion for summary
judgment on the breach-of-contract counterclaims brought
against Staffing, and granted respondents' motion for
summary judgment in part, dismissing the conversion and
civil-theft claims brought against respondents. The district
court also denied Staffing's motion for leave to amend
the complaint to add a statutory claim for delay in payment
November 2015, the parties took the case to a jury trial on
Staffing's breach-of-contract, fraud-in-the-inducement,
and defamation per se claims. Before the start of trial, the
district court found that the TMS services agreement was
ambiguous and allowed the parties to present parol evidence
to show the intent of the parties. The district court did not
specify which contract terms were ambiguous. At trial, the
parties' main disagreements were (1) whether under the
TMS services agreement, TMS could pass on the workers'
compensation costs to Staffing as a "cost of payroll,
" which under the contract language was a part of
TMS's "management fees" subtracted from
Staffing's commission, (2) whether under the termination
terms of the TMS services agreement, Staffing owed TMS a
buyout fee, and (3) whether TMS and its officers defamed
Staffing. A central theme of Staffing's case was that
Dourgarian was not credible, dishonest, and acted in bad
November 18, 2015 (day two of trial), the district court
ruled, over respondents' objection, that Staffing could
ask Dourgarian, per Minn. R. Evid. 608(b), whether a judge
had ever found his testimony not credible. On November 20
(day four of trial), Staffing moved for leave to amend the
complaint to add a claim for punitive damages against
Dourgarian, which the district court denied as untimely. Over
respondents' objection, the district court instructed the
jury that "ambiguous contract terms are to be construed
against the drafter."
jury found that (1) TMS breached its contract with Staffing,
awarding Staffing $451, 732.77 in damages, (2) Dourgarian and
TMS were liable for defamation, awarding Staffing $30, 000 in
damages, and (3) TMS was not liable for fraud. Post-trial,
the district court denied respondents' motions for
judgment as a matter of law and a new trial.
March 2016, the parties appealed the district court
administrator's award of costs and disbursements. The
district court affirmed the court administrator's
determination of all of respondents' costs and
disbursements, and awarded Staffing additional costs and
disbursements on top of the amount originally awarded.
the district court err in granting summary judgment in favor
of respondents on Staffing's conversion claim?
the district court err in granting summary judgment in favor
of respondents on Staffing's civil-theft claim?
Did the district court abuse its discretion in denying
Staffing's motion to amend the pleadings to add a
statutory claim for unpaid commissions?
the district court abuse its discretion in denying
Staffing's motion brought during trial to amend the
pleadings to add a claim for punitive damages?
the district court abuse its discretion in affirming the
court administrator's award of costs and disbursements
for certain respondents?
the jury instructions regarding interpretation of ambiguous
contract terms materially misstate the law and constitute
reversible error when the instructions did not prioritize the
charge to determine the intent ...