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Dubuque Injection Service Co. v. Kress

Court of Appeals of Iowa

June 21, 2017

DUBUQUE INJECTION SERVICE COMPANY, Plaintiff/Counterclaim Defendant-Appellant/Cross-Appellee,
v.
STEVEN J. KRESS, Defendant/Counterclaim Plaintiff-Appellee/Cross-Appellant. DUBUQUE INJECTION SERVICE COMPANY, Plaintiff,
v.
BK DIESEL SERVICE, INC. Defendant/Cross-Appellant.

         Appeal from the Iowa District Court for Dubuque County, Monica Ackley, Judge.

         Dubuque Injection Service Company (DIS) appeals, and Steven Kress cross-appeals the outcome of a jury trial on claims by DIS for breach of fiduciary duty, misappropriation of trade secrets, and interference with business relationships and on Steven's counterclaim for unpaid wages. AFFIRMED ON APPEAL AND ON CROSS-APPEAL.

          Paul D. Gamez, Kevin J. Visser, and Abbe M. Stensland of Simmons Perrine Moyer Bergman P.L.C., Cedar Rapids, for appellant.

          Richard K. Whitty, Peter D. Arling, and McKenzie R. Hill of O'Connor & Thomas, P.C., Dubuque, for appellee.

          Heard by Danilson, C.J., and Potterfield and Bower, JJ.

          DANILSON, Chief Judge.

         Dubuque Injection Service Company (DIS) appeals the district court's denial of its motion for new trial following a jury verdict finding Steven Kress-a shareholder of DIS-not liable for breach of fiduciary duty, and finding Steven[1]and BK Diesel Service, Inc. (BK) not liable for misappropriation of trade secrets and interference with business relationships. DIS asserts a new trial should be granted because the district court erred in (1) allowing admission of evidence regarding two non-parties' personal bankruptcy, (2) instructing the jury on the ratification defense, and (3) refusing to allow the admission of protective orders regarding trade secrets into evidence. Steven cross-appeals on the basis of an evidentiary ruling affecting Steven's counterclaim against DIS for unpaid wages. We conclude none of the claims raised by the parties on appeal and cross-appeal warrant reversal or a new trial and therefore affirm.

         I. Background Facts & Proceedings.

         DIS was formed in 1987 by Steven, Doug Hefel, and Randy Hefel after Steven approached Doug with the idea of purchasing a local diesel injection repair company. Randy was appointed president of DIS, Doug vice president, and Steven secretary and treasurer. Steven, Doug, and Randy are the only shareholders of DIS, each owning a one-third interest.

         Steven had some previous knowledge of the trade, and it was the understanding of the parties at the outset Steven would run the business. Doug was involved for the first year helping to gain attention for the business, but subsequently had minimal involvement. Randy, who has an education in accounting, set up the books for DIS and did the bookkeeping for a period of time. However, Randy's day-to-day involvement in DIS stopped between 1990 and about 2008, when Randy again began working regularly at DIS. Steven completed training in the diesel-fuel-injection trade and managed the business and the on-site shop. Steven worked long hours, opening and closing the shop each day. DIS was able to get off its feet and eventually excelled. A distribution was first made to each of the shareholders in 1996. Throughout the years, the shareholders each received distributions totaling approximately $370, 000.

         In the early years of the company, Steven was paid a salary of approximately $20, 000 or $30, 000 a year. By 1990 Steven's salary had risen to $54, 500. Steven's salary steadily increased between 2000 and 2010-his tax return reflecting an income of $499, 950 in 2010. Steven conceded he was in charge of payroll for the company, but asserted in 2006 Randy told Steven to begin taking his salary in one or two lump sums, leaving $100, 000 to $150, 000 in the DIS bank account. Doug and Randy maintained they were unaware of the amount of Steven's salary.

         The record also reflects Steven purchased personal items through DIS, including vehicles in 2005, 2007, and 2010; the gas for Steven's home; Steven's cell phone service; vehicle parts; a gun safe; and other items. Members of Steven's family were added to the DIS payroll although, except for Steven's son, they did not work there. Steven stated Randy told him in order to save taxes he should make purchases through DIS from money that he would have been paid in salary. Steven also stated Randy told him to include his family members on the payroll, also to save tax money. Doug and Randy claimed they did not know about the personal purchases or the family members on the DIS payroll. However, the personal purchases made and the addition of Steven's family members to the payroll were documented and reflected in the DIS business records, as was Steven's yearly salary.

         A bookkeeping mistake caused Steven to take too much money for his salary in 2010, resulting in a loss to DIS for the year. Doug and Randy called a shareholder meeting for December 12, 2011. At the meeting, Doug and Randy voted to remove Steven as a director and officer of DIS but asked that he continue managing the company. Also at the meeting, Doug and Randy offered to sell their shares to Steven for $400, 000 each.

         Steven testified that on December 12, 2011, he requested the bookkeeper issue a check to the Internal Revenue Service in the amount of $100, 000 to cover his anticipated 2011 tax liability.[2] Randy later directed the bookkeeper to reverse the payment.

         Doug and his wife filed for bankruptcy in October 2010. After the December 12, 2011 meeting, Steven learned Doug had substantially undervalued his shares in DIS in the bankruptcy proceedings, despite demanding $400, 000 from Steven for the shares. Steven also learned Doug had taken out an individual loan in the amount of $170, 000 and signed a personal guaranty for $400, 000 for one of his other companies.

          Based on this knowledge, Steven claimed he felt he could no longer trust Doug and Randy. Therefore, Steven removed an amount of DIS business records from the company building and took them to his home to protect his interest and to prevent the records from being altered. Steven also claimed he no longer wanted to rent the DIS shop space from Randy, so he met with a commercial lender to inquire about obtaining a loan for a new building. During the meeting, Steven provided both personal and DIS financial information to the lender.

         On the night of January 3, 2012, Randy called Steven to obtain the company's Quick Books software password. Steven refused, and instead told Randy to meet him at the DIS building the next day to review any Quick Books records. The next morning Randy met Steven and his son in the DIS parking lot and informed them they were both on unpaid leave.

         On January 5, 2012, Steven made a counteroffer to purchase Doug and Randy's DIS shares for a total of $400, 000, which they rejected. In March 2012, Steven purchased a new building and, in June 2012, Steven and his business partner, Mike Boge, opened BK. Between March and June, DIS filed this lawsuit against Steven. The lawsuit was later consolidated with a February 27, 2014 lawsuit filed by DIS against BK.

         The jury trial began on June 23, 2015. The jury returned its verdict on July 2, 2015, denying all claims by DIS and denying Steven's counterclaim. DIS now appeals and Steven cross-appeals.

          II. Standard of Review.

         We review evidentiary rulings for an abuse of discretion. Hall v. Jennie Edmundson Mem'l Hosp., 812 N.W.2d 681, 685 (Iowa 2012). "An abuse of discretion exists when the court exercises its discretion on 'grounds or for reasons clearly untenable or to an extent clearly unreasonable.'" Heinz v. Heinz, 653 N.W.2d 334, 338 (Iowa 2002) (citation omitted).

         We review challenges to jury instructions given by the district court for correction of errors at law. Alcala v. Marriott Int'l, Inc., 880 N.W.2d 699, 707 (Iowa 2016); see also State v. Schuler, 774 N.W.2d 294, 297 (Iowa 2009) ("We review jury instructions to decide if they are correct statements of the law and are supported by substantial evidence." (citation omitted)).

         III. Analysis.

         DIS contends a new trial is warranted because the trial court improperly allowed evidence of Doug's personal bankruptcy to be admitted at trial, instructed the jury on the ratification defense, and did not allow admission of previously-filed protective orders regarding trade secrets. Steven asserts a new trial is warranted on his counterclaim because the trial court improperly allowed admission of a DIS audit-trail document.

         A. Bankruptcy.

         DIS challenges the district court's decision to allow evidence regarding Doug and his wife's personal bankruptcy to be admitted at trial. Steven asserts error is not fully preserved on this issue because counsel for DIS did not make proper objections during all the instances the bankruptcy evidence was discussed in testimony.

          "To preserve error for appellate review, a party must alert the district court to the issue at a time when the district court can take corrective action." Schmitt v. Koehring Cranes, Inc., 798 N.W.2d 491, 496 (Iowa Ct. App. 2011). "Additionally, the grounds of the objection must be specifically stated to inform the trial court of the basis for the complaint." Id. at 501.

         DIS contends it preserved error by its motion in limine, objections, or both. The motion in limine attempted to exclude any mention of the personal bankruptcy of Doug Hefel and his spouse and the associated proceedings, as well as any criminal investigation and civil proceedings currently pending and related to the bankruptcy proceedings. With respect to the preservation of error by a motion in limine, our supreme court recited the applicable principles in Quad City Bank & Trust v. Jim Kircher & Associates, P.C., 804 N.W.2d 83, 89-90 (Iowa 2011):

A ruling sustaining a motion in limine is generally not an evidentiary ruling. Twyford v. Weber, 220 N.W.2d 919, 923 (Iowa 1974). Rather, a ruling sustaining a motion in limine simply adds a procedural step to the introduction of allegedly objectionable evidence. Id.; accord Johnson v. Interstate Power Co., 481 N.W.2d 310, 317 (Iowa 1992) (recognizing a ruling sustaining a motion in limine "merely adds a procedural step to the offer of evidence [and that i]f the evidence is not offered, there is nothing preserved to review on appeal"). Thus, a motion in limine "serves the useful purpose of raising and pointing out before trial certain evidentiary rulings the court may be called upon to make during the course of the trial" and, if sustained, excludes reference or introduction of this evidence until its admissibility is determined by the trial court, outside the presence of a jury, in an offer of proof. Twyford, 220 N.W.2d at 922-23 (recognizing further that the offer of proof allows the aggrieved party to present a proper record for review on appeal and, in the absence of such an offer, error may not be preserved).
The abovementioned rules regarding a motion in limine serve as the basis for the rule that "error claimed in a court's ruling on a motion in limine is waived unless a timely objection is made when the evidence is offered at trial." State v. Alberts, 722 N.W.2d 402, 406 (Iowa 2006) (quoting State v. Tangie, 616 N.W.2d 564, 568 (Iowa 2000)) (internal quotation marks omitted); accord Simkins v. City of Davenport, 232 N.W.2d 561, 565 (Iowa 1975). This is because the error only occurs, if at all, when the evidence is offered at trial and is either admitted or refused. State v. Langley, 265 N.W.2d 718, 720 (Iowa 1978) (recognizing further, normally "the ruling is not a final one; it is a red flag to counsel that the evidence is not to be brought before the jury unless and until it is separately taken up with the court . . . at trial"). There is, however, an exception to this general rule. When the court's ruling on a motion in limine leaves no question that the challenged evidence will or will not be admitted at trial, counsel need not renew its objection to the evidence at trial to preserve error. Alberts, 722 N.W.2d at 406; State v. Miller, 229 N.W.2d 762, 768 (Iowa 1975). "In such a situation, the decision on the motion has the effect of [an evidentiary] ruling." Tangie, 616 N.W.2d at 569 (quoting Miller, 229 N.W.2d at 768) (internal quotation marks omitted).
The key to deciding whether the general rule or the exception applies in a given case is determining what the trial court purported to do in its ruling. Alberts, 722 N.W.2d at 406. As we have recognized:
"A ruling only granting or denying protection from prejudicial references to challenged evidence cannot preserve the inadmissibility issue for appellate review." However, "if the ruling reaches the ultimate issue [of admissibility] and declares the evidence admissible or inadmissible, it is ordinarily a final ruling and need not be questioned again during trial [to preserve error]."
Id. (quoting State v. O'Connell, 275 N.W.2d 197, 202 (Iowa 1979)). Compare State v. Daly, 623 N.W.2d 799, 800 (Iowa 2001) (holding that an exception to the general rule applied when counsel asked the court whether its ruling was the final order of the court and the court responded, "yes"), with Johnson, 481 N.W.2d at 316-17 (holding the general rule applied, and error was not preserved, when the court's ruling merely prohibited a party from mentioning the challenged evidence without first obtaining permission from the court outside the presence of the jury). Accordingly, . . . we first must determine the intent of the district court ruling on [the movant's] motion in limine.

         Here, the district court's ruling or position evolved as the hearing progressed. Unfortunately, we do not have a written order in limine that could clearly define the limits of admissibility and provide aid to counsel to preserve error. In the absence of a written order, we have closely examined the official transcript of the hearing. From our examination of that record, we conclude the district court unambiguously partially overruled the motion and determined any evidence that one of the owners of DIS, Douglas Hefel, had filed bankruptcy, had received a bankruptcy discharge, and had the discharge revoked was admissible. The motion was also unambiguously overruled to the extent Steven could testify someone told him not to talk to the bankruptcy trustee if contacted, and Steven knew Doug had substantially undervalued his share in the company. On these issues the motion in limine was "resolved in such a way it [was] beyond question whether or not the challenged evidence [would] be admitted during trial, " and counsel for DIS was not required to make specific objections to the evidence as it was presented. Tangie, 616 N.W.2d at 569 (citation omitted).

         The motion in limine was sustained to the extent no reference was to be made relative to Doug's bankruptcy schedules, the specific reason why the bankruptcy discharge was revoked, or any evidence of a federal indictment.

         The court also indicated Steven could testify in a limited fashion that Steven did what he did because of his perceptions of this knowledge. However, the court-on two occasions-indicated it would have to "hear how the story is laid out" and "I don't know exactly how all of this would be presented, so I am going to have to see it as it develops." The court even indicated the questions on this topic "are going to have to be very narrow and then they're going to be subject to, I assume, a great deal of objection."

         DIS has not recited the disputed evidence as it came in during the trial, and as best as we can determine, the following portions of testimony are the extent of such evidence.

(1) During Steven's testimony on cross-examination by Steven's counsel:
Q. . . . In 2010, did you come to learn that your fellow shareholder, Douglas Hefel, had filed for bankruptcy protection? . . . . A. Yes.
Counsel for DIS objected to this testimony on the basis of hearsay.
(2) Also on Steven's testimony on cross-examination:
Q. During his bankruptcy, did he ever talk to you about a problem that he was having with a creditor known as Dutrac Community Credit Union?
A. I did talk to Doug about the problems he was having with Dutrac Community Credit Union. Counsel for DIS objected to this testimony on the basis of relevance.
(3) On direct examination of Doug's wife:
Q. There has been some testimony that you and your husband took bankruptcy. Do you recall the date on which ...

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