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Johnson v. Crossett

Supreme Court of Idaho

January 10, 2018

DAVID JOHNSON, an individual, and TESSA COUSINS, an individual, Plaintiffs-Appellants,
DAVID CROSSETT, an individual, Defendant-Respondent, and SCOTT H. LEE, an individual; DRUG TESTING COMPLIANCE GROUP, LLC, an Idaho limited liability company; VURV, LLC, an Idaho limited liability company; BO W. and KRYSTAL SCHMELLING, a married couple, Defendants

         2018 Opinion No. 6

         Appeal from the District Court of the Fourth Judicial District of the State of Idaho, Ada County. Hon. D. Duff McKee, District Judge.

         The district court's judgment is affirmed. Attorney fees and costs on appeal are awarded to respondent.

          Jacobson & Jacobson, PLLC, Boise, attorneys for appellant. James F. Jacobson argued.

          Points Law, PLLC, Boise, attorneys for respondent. Michelle R. Points argued.

          JONES, Justice.

         I. Nature of the Case

          This case arises from an oral agreement between David Crossett ("Crossett") and David Johnson ("Johnson") to form a limited liability company ("LLC"). After Crossett formed the LLC, Johnson backed out by refusing to sign the written operating agreement. Crossett remained as the sole member of the LLC, which he eventually sold. Johnson and Tessa Cousins ("Cousins"), the LLC's only employee, filed a complaint against Crossett, wherein they asserted, inter alia, that: (1) they were members of the LLC since its inception; and (2) Crossett had breached his fiduciary duties. The district court dismissed the case after concluding that Johnson and Cousins were never members of the LLC because they had refused to sign the written operating agreement. We affirm the district court's judgment.

         II. Factual and Procedural Background

         Around 2012, or early 2013, Johnson learned that his brother-in-law ("Brother-In-Law") had recently started a call center business that provided drug and alcohol testing services to commercial drivers. The business was aimed at a niche market created by federal regulations that required commercial drivers to establish and maintain drug and alcohol compliance plans for their trucking operations. Brother-In-Law claimed that his business was lucrative, which piqued Johnson's interest. In the early months of 2013, Johnson spoke with Crossett about starting a business similar to Brother-In-Law's business. By April 2013, Johnson and Crossett had reached an oral agreement (the "Oral Agreement"), which included the following general terms: Crossett would be the sole agent and manager, receive a fixed salary (which would be paid before any profit distributions), and own a 46% interest. Further, according to the Oral Agreement, Johnson would not be involved in day-to-day operations, nor would he receive any fixed compensation, but he would own a 44% interest. The two men also agreed that Crossett would contact Cousins, who was an employee at Brother-In-Law's company, to recruit her to their company. Cousins joined the company in May 2013. The terms of her employment are unclear besides the fact that she was to receive a fixed salary and, at some point, a 10% interest in the company. However, Cousins was not a part of the Oral Agreement.

         In June 2013, Crossett filed a certificate of organization to form the company, Drug Testing Compliance Group, LLC ("DTC"), as a single-member LLC. Crossett was the sole member upon filing. By the end of July 2013, a complete, written operating agreement (the "Written Agreement") was prepared and approved by Johnson and Crossett; however, it was never signed. Notwithstanding the fact that the Written Agreement remained unsigned, DTC opened for business in July 2013. Shortly after opening, DTC was sued by Brother-In-Law's company. Due to the lawsuit, Johnson refused to sign the Written Agreement because he did not want Brother-In-Law, or any other members of his extended family, to know that he was associated with DTC, which was in direct competition with Brother-In-Law's company. Johnson went so far as to sign a written statement for Brother-In-Law's attorney, which was not under oath, wherein he "confessed" that he had mentioned to Crossett that Brother-In-Law ran a successful drug testing business. Although Johnson characterized the statement as a confession, he did not disclose that he was associated with DTC. Johnson told his wife that he planned to keep his interest in DTC a secret. Johnson told Crossett that he would sign the Written Agreement once "the dust settled."

         Crossett grew DTC's business quickly. In 2013, it grossed nearly $200, 000, and, in 2014, it grossed nearly $1.1 million; however, with the rapid growth came a flood of management problems including: serious cash flow issues, high rates of cancellation caused by bad publicity, and significant legal fees from defending against Brother-In-Law's lawsuit. The initial lawsuit with Brother-In-Law's company was settled in early 2014, but another lawsuit between the companies started later that year. On October 2, 2014, Cousins tendered a letter of resignation. She was paid all of the money that she was owed.

         In late 2014, Crossett insisted that Johnson sign the Written Agreement and join him in personally guaranteeing some of the $200, 000 that was due to DTC's attorneys. Johnson refused to sign the Written Agreement, claiming that all of DTC's problems were Crossett's to solve. Johnson stated that he would not sign the Written Agreement until those problems were resolved.

         Johnson and Crossett could not come to terms, and Crossett finally declared that he would continue to operate DTC as a single-member LLC and do what he could to salvage the business. Johnson was repaid about $10, 000-the money that he had originally invested for office equipment and supplies. Johnson acknowledged that he had been fully repaid as of December 2014.

         Sometime after parting ways with Johnson, Crossett consulted with Scott Lee, who was familiar with call center operations. Crossett and Lee agreed that DTC's sales would be outsourced to a separate call center that Lee would manage. This separate call center, named Vurv, was formed by Crossett and Lee as an LLC. Notwithstanding the fact that all of DTC's sales were outsourced to Vurv, Crossett continued to operate DTC as a separate company through 2015. However, due to DTC's serious cash flow problems and mounting legal debt, Crossett agreed to sell all of DTC's assets to Vurv in exchange for the payment of DTC's debts. This transaction closed in December 2015. Prior to the sale, DTC was insolvent: its assets did not exceed $50, 000 and its liabilities were between $240, 000 and $280, 000. After the sale, DTC was a shell of a company with no assets or liabilities.

         On August 10, 2015, Johnson filed a complaint against Crossett, and on April 8, 2016, Johnson filed an amended complaint, which added Cousins as a plaintiff. In the amended complaint, Johnson and Cousins (collectively, "Appellants") alleged, inter alia, that: (1) they were and always had been members of DTC; (2) Crossett improperly expelled them from DTC; (3) Crossett failed to properly distribute DTC profits; and (4) Crossett breached his fiduciary duties as a member and a manager of DTC. The amended complaint included the following allegation, which is a focus of Appellants' argument on appeal:

14. On or about June 5, 2013, Defendant filed, on behalf of the business that Plaintiffs and Defendant Crossett had formed, articles of organization for an Idaho limited liability company, listing himself as a Member or Manager and as the registered agent. The limited liability company was named "Drug Testing Compliance Group, LLC."

(Emphasis added). Crossett admitted to this allegation (the "Admission") in his answer.

         A two-day bench trial was held on October 17 and 18, 2016, and on November 1, 2016, the district court issued its findings of fact, conclusions of law, and directions for entry of judgment. After a thorough review of the facts, which included several references to trial testimony from Johnson, Crossett, Cousins, and Lee, the district court found that the Oral Agreement served as an operating agreement for DTC to the extent that it was an agreement to operate DTC until the Written Agreement was ready to be signed. Specifically, the district court found that, according to the Oral Agreement, Johnson and Cousins would only become members once they signed the Written Agreement.

         The district court found that Johnson attempted to unilaterally change the Oral Agreement by refusing to sign the Written Agreement when it was ready to be signed in July 2013. The district court noted that Johnson's refusal to sign the Written Agreement left Crossett holding the bag as the sole member of DTC with all the risk of carrying the company's operations forward.

          The district court held that Appellants failed to prove that they were members of DTC. The district court concluded that Cousins never became a member of DTC because she was not a party to the Oral Agreement and she never signed the Written Agreement. The district court held that, although Johnson and Crossett agreed at the outset that they would both be members of DTC (with Cousins to be included as a member at a later time), the Oral Agreement included an understanding that Appellants would become members when they signed the Written Agreement; therefore, Appellants never became members of DTC because they refused to sign the Written Agreement.

         The district court quickly disposed of the two remaining allegations: (1) Crossett did not breach any fiduciary duty as to Appellants because Appellants were paid all of the money that they were owed and were not members of DTC; and (2) Crossett was not liable for the money he withdrew from DTC because Appellants had failed ...

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