Opinion
Case No. 2:03-CV-00528 DB.
March 16, 2005
ORDER
Before the Court is Counterclaim Defendants' motion for summary judgment on Counterclaimants' allegations of (1) fraud; (2) breach of contract; (3) breach of fiduciary duty; (4) violation of Rule 10b-5; (5) violation of Utah Code Ann. § 61-1-1; and (6) civil conspiracy. The parties appeared before the Court on March 10, 2004, to argue the motion. Having considered the parties' arguments, briefs, and the relevant law, the Court issues the following Order.
ANALYSIS
Summary Judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). In order to defeat a motion for summary judgment, the nonmovant must "set forth specific facts showing that there is a genuine issue for trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 n. 3 (1986). The Court views the evidence and any inferences drawn therefrom in the light most favorable to the nonmovant. See Doi v. Univ. of Utah, No. 2:03CV216, 2004 U.S. Dist. LEXIS 22787, at *3 (D. Utah Oct. 28, 2004).
I. FRAUD
Counterclaimants allege that Counterclaim Defendants committed fraud during merger negotiations to induce Counterclaimants to enter into a merger in June 2000. Specifically, Counterclaimants allege that Counterclaim Defendants lied about owning valuable "secret sauce" middleware software. Counterclaim Defendants argue that the fraud claim is barred by the three-year statute of limitations found in Utah Code Ann. § 78-12-26(3) (2004). Section 78-12-26(3) provides as follows: "An action may be brought within three years for relief on the ground of fraud or mistake; except that the cause of action in such case does not accrue until the discovery by the aggrieved party of the facts constituting the fraud or mistake."
The parties disagree as to how this statute applies to the case at hand. Counterclaimants argue that their claim, filed August 1, 2003, is timely because they discovered the alleged fraud in October 2000 and therefore had until October 2003 under the statute to file their claim. Counterclaimant Defendants argue that the statute of limitations began to run on the date of the merger, June 1, 2000, and that because Counterclaimants actually discovered the alleged fraud before June 1, 2003, their claim is barred under the statute.
Generally, a statute of limitations begins to run upon the happening of the last event necessary to complete the cause of action. Russell Packard Dev. v. Carson, ___ P.3d ___ (Utah 2005), 2005 UT 14, ¶ 20. "Once a statute has begun to run, a plaintiff must file his or her claim before the limitations period expires or the claim will be barred." Id. The Utah Supreme Court has acknowledged, however, "two narrow settings in which a statute of limitations may be tolled until the discovery of facts forming the basis for the cause of action." Id. at ¶ 21 (quotations and citations omitted). The first setting in which this "discovery rule" is applied is when a statute, by its own terms, mandates its use. Id. This is called a "statutory discovery rule." Id. The second setting in which the rule is applied is when a statute contains no statutory discovery rule, but the court, applying equitable principles, finds that the statute of limitations should nonetheless be tolled. Id. at ¶ 24. This is called an "equitable discovery rule." Id. The statutory and equitable discovery rules operate differently and in a mutually exclusive manner. Id.
The Utah Supreme Court has noted that the statute at issue in this case, section 78-12-26(3), calls for application of the statutory discovery rule. Id. at ¶ 21. "Application of [the] statutory discovery rule is, in its broadest and most basic sense, a relatively simple matter." Id. at ¶ 22. To apply the rule, the Court must identify the date "a plaintiff either discovered or should have discovered his or her claim. A plaintiff would then have three years from that date within which to file a complaint before the statute would bar recovery on the claim." Id. at ¶ 23.
Utah law has long interpreted the word "discover" in the statute to mean the time when the plaintiff knew or should have known of the cause of action. See, e.g., Horn v. Daniel, 315 F.2d 471, 474 (10th Cir. 1962) ("[T]he possession of all information necessary to discover the fraud satisfies the requirements of the Utah statute.").
Applying these legal principles to the case at hand, the Court finds that the three-year statute of limitations on Counterclaimants' fraud claim began to run on the date that Counterclaimants discovered, or should have discovered, their claim. Counterclaim Defendants are mistaken in their argument that Counterclaimants' actual discovery of the fraud claim in October 2000 operates somehow to nullify the statutory discovery rule. "[T]he question is not whether the discovery rule applies — it does by virtue of the statute, but rather when a plaintiff either discovered or should have discovered his or her cause of action, thereby triggering the running of the statute of limitations." Id. at ¶ 21 (quotation and citation omitted). The cases cited by Counterclaim Defendants in support of their argument involve applications of the equitable discovery rule rather than the statutory rule and are therefore inapposite.
The only remaining question, consequently, is the question of when Counterclaimants discovered, or should have discovered, their fraud claim. Counterclaim Defendants argue that the claim should have been discovered on the date of the merger, June 1, 2000, and that no reasonable jury could conclude otherwise. Counterclaimants argue that they could not have discovered the claim earlier than October 2000. Having reviewed the arguments and relevant pleadings, the Court finds that there is sufficient factual dispute as to the date of discovery in this case to preclude a summary judgment ruling. See id. at ¶ 22 ("[D]etermining when a plaintiff either discovered or reasonably should have discovered his or her cause of action is often a difficult and intensely fact-dependent inquiry."); Sevy v. Sec. Title Co. of S. Utah, 902 P.2d 629, 635 (Utah 1995) ("[T]he issue of when a claimant discovered or should have discovered the facts forming the basis of a cause of action is a question of fact. . . ."). Counterclaim Defendants' motion for summary judgment on this claim is therefore DENIED.
II. BREACH OF CONTRACT
Counterclaimants conceded during the March 10, 2004 hearing that their breach of contract claim fails. Accordingly, Counterclaim Defendants' motion for summary judgment on this claim is GRANTED.
III. BREACH OF FIDUCIARY DUTY
Counterclaimants conceded during the March 10, 2004 hearing that they do not have an actionable breach of fiduciary duty claim against Counterclaim Defendant Darwin Melnyk. Therefore, the motion for summary judgment is GRANTED as to Darwin Melnyk. With regard to Counterclaim Defendant Ron Melnyk, the claim survives. Counterclaimants allege that Ron Melnyk breached his fiduciary duty as an officer or director of the company by failing to disclose the nonexistence of the "secret sauce" middleware software from the time of the merger in June 2000 to the time of Counterclaimants' discovery of the alleged fraud in October 2000. The Court finds that Counterclaimants have sufficiently supported this claim so as to a make summary judgment inappropriate. Counterclaim Defendants' motion for summary judgment on the breach of fiduciary duty claim against Ron Melnyk is therefore DENIED.
IV. VIOLATION OF RULE 10b-5
Counterclaimants conceded in their briefs that their claim based on Rule 10b-5 is barred by the statute of limitations. Because this claim is not actionable, Counterclaim Defendants' motion for summary judgment as to this claim is GRANTED. Counterclaimants argue, however, that they are nonetheless entitled to present this claim as an offset to any recovery ultimately obtained by Counterclaim Defendants.Counterclaim Defendants invoke the offset doctrine, which allows a defendant in certain circumstances to use a time-barred counterclaim as an offset to a plaintiff's claim. See Jacobsen v. Bunker, 699 P.2d 1208, 1210 (Utah 1985). The doctrine is grounded in Rule 13(i) of the Utah Rules of Civil Procedure, which provides, in part, as follows: "When cross demands have existed between persons under such circumstances that, if one had brought an action against the other, a counterclaim could have been set up, the two demands shall be deemed compensated so far as they equal each other. . . ." Id.; Utah R. Civ. P. 13(i). The doctrine applies only to claims that have coexisted as live demands. See Cox v. Dixie Power Co., 16 P.2d 916, 922 (Utah 1932); Salt Lake City v. Telluride Power Co., 17 P.2d 281, 285 (Utah 1932).
Rule 13(i) adopted Comp. Laws of Utah section 6578 (1917).Jacobsen, 699 P.2d at 1210.
The offset doctrine invoked by Counterclaimants is seldom discussed or applied in Utah case law. A review of the relevant cases reveals that the doctrine is driven mainly by principles of substantial justice and equity. See Collard v. Collard, 57 P.3d 603, 608-09 (Utah Ct.App. 2002) ("[O]ffset and recoupment are merely mechanisms that may be used to ensure substantial justice if a party asserts a counterclaim that is barred by the statute of limitations."); id. at 609 ("Allowing an offset in this case is appropriate . . . because equity requires it."). The cases generally involve defendants whose right to recover, absent the statute of limitations, is clear, as established by agreements, decrees, or specific exchanges contained in the case record. See Jacobsen, 699 P.2d at 1209 (involving mutual promissory notes); Stewart Livestock Co. v. Ostler, 144 P.2d 276, 278-81 (Utah 1943) (involving agreement for sale of real estate); Cox, 16 P.2d at 917-19, 922 (stating that had defendant's claim "been set up as a counterclaim, not anything with respect thereto could have been made more certain or definite, or the defendant's right to a set-off more clearly shown, than is now intrinsically shown by the record."); Telluride Power Co., 17 P.2d at 282-83 (involving water usage decree); Collard, 57 P.3d at 604-07 (involving contract for sale of real estate); Coulon v. Coulon, 915 P.2d 1069, 1070-71 (Utah Ct.App. 1996) (involving divorce decree).
In this case, the Court finds that substantial justice and equity do not require addressing Counterclaimant's security claim as an offset. The security claim is distant, both substantively and temporally, from the claims presented by Counterclaim Defendants. Counterclaim Defendants did not assert any security claims related to the 2000 merger, nor did they assert any claims arising from pre-merger conduct. In contrast, Counterclaimants' allegation relates to negotiations and representations that culminated and ended in the 2000 merger. Moreover, Counterclaim Defendants' right to recover on the security claim absent the statute of limitations, and what the recovery amount might be, is far from clear. For these reasons, the Court DENIES Counterclaimants' request for application of the offset doctrine.
V. UTAH CODE ANN. § 61-1-1 VIOLATION
Counterclaimants conceded in their briefs that this claim is barred by the statute of limitations. Because this claim is not actionable, Counterclaim Defendants' motion for summary judgment as to this claim is GRANTED. As with the 10b-5 claim, Counterclaimants argue that they should be allowed to pursue this claim solely for offset purposes. The Court DENIES Counterclaimants' request for application of the offset doctrine for the reasons discussed above.VI. CIVIL CONSPIRACY
The Court, having reviewed the pleadings related to Counterclaimants' conspiracy claim, finds that Counterclaimants have not sufficiently responded to Counterclaim Defendants' motion for summary judgment. "To prove the tort of civil conspiracy, a plaintiff must generally establish concert of action or other facts and circumstances from which the natural inference arises that the unlawful, overt acts were committed in furtherance of a common design, intention, or purpose of the alleged conspirators." Waddoups v. Amalgamated Sugar Co., 54 P.3d 1054, 1064 (Utah 2002) (quotation and citation omitted);see also Alta Indus. v. Hurst, 846 P.2d 1282, 1290 n. 17 (Utah 1993) ("To prove civil conspiracy [in Utah], five elements must be shown: (1) a combination of two or more persons, (2) an object to be accomplished, (3) a meeting of the minds on the object or course of action, (4) one or more unlawful, overt acts, and (5) damages as a proximate result thereof." (quotation and citation omitted)). To avoid summary judgment, Counterclaimants must offer specific evidence that could be interpreted to satisfy the elements of the claim. Waddoups, 54 P.3d at 1064. The Court finds that Counterclaimants failed to do so and accordingly GRANTS Counterclaim Defendants' motion for summary judgment on the civil conspiracy claim. See id.
CONCLUSION
Counterclaim Defendants' motion for summary judgment is DENIED as to Counterclaimants' allegations of fraud and breach of fiduciary duty. The motion is GRANTED as to Counterclaimants' allegations of breach of contract, violation of Rule 10b-5, violation of Utah Code Ann. § 61-1-1, and civil conspiracy. Counterclaimants' request to reserve their securities claims for offset purposes is DENIED.IT IS SO ORDERED.