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Staffing Specifix, Inc. v. TempWorks Management Services, Inc.

Court of Appeals of Minnesota

April 10, 2017

Staffing Specifix, Inc., Appellant,
TempWorks Management Services, Inc., individually and d/b/a TMS Staffing; et al., Respondents.

         Hennepin County District Court File No. 27-CV-14-15139

          Christopher P. Parrington, Andrew R. Shedlock, Kutak Rock, LLP, Minneapolis, Minnesota (for appellant)

          Daniel 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.


         When 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.



         In this 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.

         By 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.

         We 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 character evidence.


         Staffing 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.

         Staffing 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.

         In 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 services agreement."

         Under 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 temporary workers.

         Section 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.

         During 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.

         On May 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 from customers.

         In 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 soon after.

         On 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.

         By 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.

         On 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.

         Dourgarian 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.

         At 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.

         On 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.

         On 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.

         On 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 of commission.

         In 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 faith.

         On 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."

         The 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.

         In 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.

         This appeal followed.


         I. Did the district court err in granting summary judgment in favor of respondents on Staffing's conversion claim?

         II. Did the district court err in granting summary judgment in favor of respondents on Staffing's civil-theft claim?

         III. Did the district court abuse its discretion in denying Staffing's motion to amend the pleadings to add a statutory claim for unpaid commissions?

         IV. Did 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?

         V. Did the district court abuse its discretion in affirming the court administrator's award of costs and disbursements for certain respondents?

         VI. Did 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 ...

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