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Sandhu v. Kanzler

United States Court of Appeals, Eighth Circuit

August 5, 2019

Baljinder Sandhu, individually; Glow Hospitality, LLC, a Minnesota Limited Liability Corporation Plaintiffs - Appellants
v.
Jay L. Kanzler, Jr., individually; Witzel, Kanzler & Dimmitt, LLC, a Missouri Limited Liability Corporation Defendants - Appellees

          Submitted: March 12, 2019

          Appeal from United States District Court for the District of Minnesota - St. Paul

          Before SHEPHERD, ARNOLD, and KOBES, Circuit Judges.

          SHEPHERD, CIRCUIT JUDGE.

         Baljinder Sandhu and Glow Hospitality, LLC appeal the district court's[1]adverse grant of summary judgment on their fraud and breach of fiduciary duty claims against attorney Jay Kanzler and their vicarious liability claims against Kanzler's employer, Witzel, Kanzler & Dimmitt, LLC (WKD). Underlying this case is "an extremely complex factual background and multiple intersecting allegations of conflicts of interest and other breaches of fiduciary duty. . . . The Court itself has had . . . difficulty sorting through the parties' claims . . . ." See Afremov v. Sulloway & Hollis, P.L.L.C., 922 F.Supp.2d 800, 816-17 (D. Minn. 2013). Having jurisdiction under 28 U.S.C. § 1291, we affirm.

         I.

         During the summer of 2007, Shivcharan Singh solicited investment funds from Baljindar Sandhu in order to purchase and run a Holiday Inn Express in Bemidji, Minnesota. Sandhu understood that, in exchange for $300, 000, he would receive a 70% ownership interest in the hotel, Singh would retain a 15% interest, and a third investor would also receive a 15% interest. Pursuant to this agreement, North East Property, LLC, of which both Sandhu and Singh were members, transferred $100, 000 to Singh to finance the hotel's purchase and payment of a franchise fee.

         Following Singh's interactions with Sandhu, Singh began working with brothers Harkrishan (Harry) and Devindar Khatkar to participate in acquisition of the hotel. In September 2007, Singh approached Missouri attorney Jay Kanzler on behalf of the Khatkars to organize a limited liability company, Glow Hospitality, LLC, to purchase and operate the hotel. Kanzler agreed to represent the Khatkars, who retained him on September 20, 2007. The engagement letter provided Kanzler's clients were the Khatkars and, once the company was created, Glow itself, but Kanzler understood that Singh had authority to act on behalf of the Khatkars and assist in transactions. The engagement letter made no reference to Sandhu as either Kanzler's client or a member of Glow, but Sandhu knew Kanzler had been engaged to create Glow.

         Kanzler filed Glow's articles of organization on October 5, 2007. The articles listed Harry and Devindar as Glow's sole organizers. Glow's Operating Agreement, executed that same day, indicated that Harry and Devindar each held a 50% ownership interest in Glow. Sandhu received a copy of this agreement and knew about the ownership interests it disclosed. Sandhu testified that, in the fall of 2007, he spoke to Kanzler, Singh, and Harry about his ownership interests in Glow via conference call, but Kanzler denies this. Regardless, Sandhu's ownership interest in Glow was not documented at this time.

         On December 3, 2007, Singh emailed Kanzler and asked him to change Glow's division of ownership to 85% for Devindar and 15% for Harry. Kanzler supplied Singh with a modified Operating Agreement reflecting this change. Sandhu received a copy. The next day, Sandhu provided Kanzler with escrow information regarding the hotel purchase. None of Sandhu's emails mentioned his purported ownership interest in Glow. On December 6, North East Property, LLC, of which both Sandhu and Singh were members, transferred $198, 500 to Glow as the final deposit for the hotel's purchase.

         The closing on the purchase of the Bemidji Holiday Inn Express occurred on January 10, 2008. Sandhu did not attend and his signature does not appear on any of the loan documents.[2] Rather, the lenders understood that Glow was equally owned by Harry and Devindar. On January 15, 2008, the Khatkars executed a franchising license agreement with Holiday Hospitality Franchising, Inc. This agreement disclosed Harry and Devindar as Glow's sole owners, with shares of 15% and 85%, respectively. On completion of the final closing documents, Glow began operating the Bemidji hotel without further involvement from Kanzler.

         In November 2008, Kanzler's clients directed him to prepare an Amended Operating Agreement and related documents redistributing Glow's ownership interests and indicating that Harry owned 48% of Glow, Devindar 3%, and Singh 49%. Kanzler drafted a membership interest assignment and assumption agreement and an Amended Operating Agreement on November 4, 2008 and emailed these documents to Singh. However, Kanzler did not speak directly to Devindar about his ownership interest reduction, stating that he generally sent documents to Singh, who would secure the necessary signatures and send the documents back.

         In December 2009, Sandhu met with Harry and Singh. He obtained a handwritten document, signed by the three men, which indicated Sandhu had invested almost $300, 000 in the Bemidji hotel in exchange for a 40% ownership interest. Kanzler was not present at this meeting and Sandhu did not send Kanzler the document. Glow's 2008 tax return described Glow's members as Sandhu, Harry, and Ajmer Singh.[3] While Kanzler did not participate in preparing the return, he did discuss Sandhu's 40% ownership interest with Harry and Singh at some point after December 12, 2010.

         In 2010, Singh and Glow were named as defendants in a California lawsuit unrelated to the Bemidji hotel. Singh signed and filed a declaration that stated he was neither a member nor an owner of Glow. He reiterated this statement in a deposition, stating that the Khatkars were Glow's sole members. However, Singh later corrected his deposition testimony to say that he was not a member of Glow in July 2008, but subsequently became one. Harry executed a declaration in the same lawsuit stating that he and Devindar were Glow's only members. Kanzler did not participate in this litigation or in the execution of Singh and Harry's declarations. In the summer of 2010, Harry filed for bankruptcy in California. A schedule filed with his bankruptcy petition claimed a 15% ownership interest in Glow. Kanzler had no role in and was not informed about Harry's bankruptcy petition.

         At a meeting in September 2010, Sandhu and other investors accused Harry and Singh of diverting funds away from Glow. Sandhu testified that he also spoke to Kanzler about his concerns. After the meeting, Sandhu attempted to gain control of Glow's deposit accounts in order to prevent Singh and Harry from diverting funds. First National Bank of Bemidji, which held the operating account for Glow, became concerned about the changes, froze the account, and requested opinion letters from counsel for Glow and Sandhu regarding Glow's ownership.

         Kanzler informed Sandhu and Devindar's attorney, Greg Gilbert, that he believed Harry, Devindar, and Singh owned Glow, and he provided Gilbert with copies of the 2008 Amended Operating Agreement and related documents. Kanzler also provided the bank's president with this documentation and opined-based on Glow's corporate governance documents, documents previously executed by Devindar, conversations with his clients, and Singh and Harry's sworn declarations-that Singh owned 49% of Glow, Harry 48%, and Devindar 3%. In addition, Harry faxed a corporate resolution to First National, which, by unanimous consent, stated that the Khatkars were Glow's only members, removed Singh and Sandhu as signators on Glow's bank accounts, and established Harry as Glow's sole authorized signator for Glow's First National accounts.

         Gilbert responded that the 2008 amended documents were neither credible nor reliable and that Glow's ownership was as it appeared in the December 2007 version of the Operating Agreement-Harry with 15% and Devindar with 85%. He stated that he considered Devindar's signatures on the corporate resolution and the November 2008 documents to be forged and that Devindar had not received executed copies of the November 2008 documents until Singh faxed them to him in September 2010.

         Neither attorney opined that Sandhu held an ownership interest in Glow. The bank deferred to Kanzler, due to his familiarity with Glow, and determined that the corporate resolution was a legitimate exercise of Glow's majority owners' authority. Gilbert then contacted Kanzler, telling him that Singh and Harry were liars and that Kanzler had "an affirmative duty to go back to [his] clients and check out the veracity of their claims and update [his] opinion." Kanzler did not change his opinion.

         Between November 2010 and January 2011, Glow was declared in default of its franchise licensing agreement with Holiday Hospitality Franchising and on one of its loans and delinquent on another loan. However, Glow cured its licensing agreement default in February 2011 and entered a forbearance agreement in March 2011 regarding the loan default. It is unclear from the record whether Glow cured its delinquency on the second loan.

         Sandhu and Devindar filed suit against Glow, Harry, Singh, and GIO Management, Inc.-a company owned by Singh-on December 12, 2010 in Minnesota state court. Kanzler was not named as a defendant. In their complaint, Sandhu and Devindar asserted claims for fraud, breach of contract, and breach of fiduciary duties, alleging that they had invested over $400, 000 into Glow in exchange for majority ownership and that Singh and Harry had illegally distributed corporate funds. They sought inspection of corporate records, the fair value of membership interests, and appointment of a receiver.

          The Minnesota state court defendants initially contacted Kanzler for assistance with the lawsuit. Kanzler secured local counsel for them and executed an affidavit detailing his knowledge of Glow's ownership and solvency. The affidavit stated that Sandhu had no ownership interest in Glow and that Kanzler knew of no documentation suggesting otherwise. On January 4, 2011, the plaintiffs' motion to appoint a receiver was denied. In August, Kanzler withdrew from participation because he could be called as a fact witness. In ...


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