Fain v. Integrity Environmental

                                                                                  FILED
                                                                          IN THE OFFICE OF THE
                                                                       CLERK OF SUPREME COURT
                                                                            DECEMBER 8, 2022
                                                                        STATE OF NORTH DAKOTA




                   IN THE SUPREME COURT
                   STATE OF NORTH DAKOTA

                                  

Scotty Fain, Sr., Scotty Fain, Jr.,
and Kris Durham,                                    Plaintiffs and Appellants
      v.
Integrity Environmental, LLC, Andrea Vigen,
Lewis Vigen, and Kelly Harrelson,                  Defendants and Appellees

                                  No. 20220068

Appeal from the District Court of Williams County, Northwest Judicial
District, the Honorable Paul W. Jacobson, Judge.

AFFIRMED.

Opinion of the Court by Jensen, Chief Justice.

Emily J. Ramage (argued) and H. Malcolm Pippin (on brief), Williston, ND, for
plaintiffs and appellants.

Morgan E. Wentz (argued), David J. Smith (on brief), and Tyler J. Malm (on
brief), Bismarck, ND, for defendants and appellees.
                     Fain v. Integrity Environmental
                               No. 20220068

Jensen, Chief Justice.

[¶1] Scotty Fain, Sr., Scotty Fain, Jr., and Kris Durham appeal from a district
court judgment entered following findings that there was no contract between
the parties, no transfer of an ownership interest in Integrity Environmental,
LLC, and no violation of fiduciary duties as alleged in its complaint against
Integrity Environmental, LLC (“Integrity Environmental”), Andrea Vigen,
Lewis Vigen, and Kelly Harrelson. They also challenge the court’s findings that
a substitute arrangement agreed upon by all parties led to an accord and
satisfaction, novation, and waiver of contractual rights. Because we conclude
the district court did not err in its finding regarding a novation and
substitution for the parties’ contractual obligations, we affirm the court’s
judgment.

                                      I

[¶2] In the spring of 2019, the parties discussed formation of an
environmental clean-up company that would do business, in part, on Indian
reservations. After several meetings, the parties signed an operating
agreement (“original agreement”) that set terms for the creation of Integrity,
LLC (“Integrity”). The operating agreement allocated membership interests to
Andrea Vigen, Lewis Vigen, Kelly Harrelson, Fain Sr., Durham, and Fain Jr.,
in exchange for initial contributions of $100, $100, $100, $100, $75,000, and
$75,000.

[¶3] To be eligible to perform the intended services, the business must have
Tier 1 status, achieved by exclusive company ownership by a Native American.
Andrea Vigen was a member of the Mandan, Hidatsa and Arikara Nation and
could satisfy the Tier 1 ownership requirement. The originally discussed
ownership allocation would not satisfy the requirement of exclusive Native
American ownership.

[¶4] At the time the Integrity operating agreement was signed, Andrea Vigen
was the owner of Integrity Environmental. Integrity Environmental had Tier

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1 status. The parties dispute whether the operating agreement for Integrity
was prepared in anticipation of organizing a new business entity or related to
a transfer of ownership in Integrity Environmental.

[¶5] Durham provided $150,000 to Integrity Environmental in two separate
increments in June and July 2019. Integrity Environmental continued to
operate through summer and fall while the parties contemplated but never
formally signed a consultant agreement, amended contract, and loan
agreement that would replace the original agreement. A recording from a
September 2019 conversation indicates the parties discussed a subsequent
loan arrangement that would preserve Integrity Environmental’s Tier 1 status
and operations on the reservation.

[¶6] In December 2019, Andrea Vigen sent a letter to Fain Sr., Fain Jr., and
Durham advising them that Integrity Environmental would be terminating
their relationship. The letter characterized Durham’s $150,000 to Integrity
Environmental as a loan, and included a check for $3,000 in interest along with
confirmation that Durham had already cashed two checks sent to him totaling
$150,000.

[¶7] Fain Sr., Fain Jr., and Durham filed a complaint claiming breach of
contract and fiduciary duty. Following a bench trial, the district court found
that all parties knew a Native American needed to maintain exclusive
ownership of Integrity Environmental in order to maintain its Tier 1 status,
that the plain language of the original agreement created a new company
called Integrity, that no mutual consent or consideration existed among the
parties to enforce the original agreement, and that subsequent negotiations led
to a final, substituted loan agreement which created an accord and satisfaction,
voluntary waiver of contractual rights, and novation. The court also dismissed
Fain Sr., Fain Jr., and Durham’s argument that a mutual mistake about the
name of the company could lead to reformation, and that Integrity
Environmental, Andrea Vigen, Lewis Vigen, or Kelly Harrelson violated their
fiduciary duties. Fain Sr., Fain Jr., and Durham appeal arguing the district
court erred in its findings of fact and conclusions of law.



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                                        II

[¶8] Fain Sr., Fain Jr., and Durham challenge many of the district court’s
findings regarding whether or not the parties agreed to create a new business
entity or transfer ownership interests in an existing entity, whether there were
subsequent agreements, and whether the subsequent agreements were
satisfied. At the center of the court’s decision is the finding the parties entered
into a novation eliminating all of their existing obligations by agreeing to treat
Durham’s $150,000 payment as a loan. Because the court’s findings regarding
a novation are dispositive, we begin our review with consideration of those
findings.

[¶9] “Novation is the substitution of a new obligation for an existing one.”
N.D.C.C. § 9-13-08. A novation is made by contract and is subject to all rules
governing contracts. N.D.C.C. § 9-13-09. Novation can be made between the
same parties as long as intent is shown to extinguish the old obligation.
N.D.C.C. § 9-13-10. Along with intent, novation requires mutual assent and
sufficient consideration. N.D. Pub. Serv. Comm’n v. Valley Farmers Bean Ass’n,

 (N.D. 1985). Additionally, terms of the contract, the
character of the transaction, and the facts and circumstances surrounding the
transaction can establish novation. Jedco Dev. Co., Inc. v. Bertsch, 

 (N.D. 1989). Acceptance or endorsement of a check is not by itself
conclusive of novation. Schmitt v. Berwick Tp., 

 (N.D.
1992). However, parties entering into a novation need not agree about the
meaning of the terms within the original obligation. 

 The existence of a
novation is a question of fact subject to a clearly erroneous standard of review.
Bearce v. Yellowstone Energy Dev., LLC, 

, ¶ 20, 

. “A
finding of fact is clearly erroneous if it is induced by an erroneous view of the
law, if there is no evidence to support it, or if, on the entire record, we are left
with a definite and firm conviction a mistake has been made.” Welch Const. &
Excavating, LLC v. Duong, 

, 

.

[¶10] Fain Sr., Fain Jr., and Durham argue the district court erred in finding
that a novation discharged the original agreement. They contend the $150,000
given by Durham to Integrity Environmental was a capital contribution and


                                         3
not a loan because there was not the presence of a strict debtor-creditor
relationship due to an absence of a fixed maturity date, and the thin
capitalization structure of the company meant that Integrity Environmental
was completely dependent upon Fain Sr., Fain Jr., and Durham for the
financing of their operation.

[¶11] The district court found that the parties’ original plan was to create a
new company that would use Integrity Environmental’s Tier 1 status “as a
gateway for their new company to work on the reservation.” The court found
that “[t]he parties were aware that the inclusion of non-Native American
owners (such as the Plaintiffs) would have destroyed Integrity
Environmental’s Tier 1 status and drastically diminished the company’s
business.” To remedy this concern, the court found the parties engaged in the
following actions:

      [T]he first operating agreement was abandoned in favor of a
      $150,000 loan. All of the parties were aware of the Tier 1 status
      and they wanted to preserve Integrity Environmental’s ability to
      work on the reservation. In fact, it was clear from the parties’
      discussions in the recording (Exhibit 37) played in court that
      Plaintiffs were providing a $150,000 interest free loan for six (6)
      months. Plaintiffs’ intent to substitute the [original agreement]
      with a loan arrangement is fatal to their argument that the Court
      should uphold it.

The district court’s findings are also supported by the parties’ documented
attempts to negotiate an amended contract and consulting agreement. These
findings satisfy the requirement of intent to extinguish an old obligation under
N.D.C.C. § 9-13-09.

[¶12] A novation requires intent, mutual assent, and sufficient consideration.
The district court addressed the requirement of mutual assent and
consideration when it found a September meeting between the parties
illustrated mutual assent to preserve Integrity Environmental’s Tier 1 status
by eliminating any plans of Fain Sr., Fain Jr., and Durham to have an


                                       4
ownership interest in the company, and created a loan agreement by which
Durham would provide $150,000 to be paid back within six months. The court
found that sufficient consideration was provided when Durham accepted
performance by repayment. The court found the loan was paid back by three
checks issued by Integrity Environmental, one in June 2019 for $50,000,
another for $100,000 in July 2019, and a final check for $3,000 for accrued
interest in December 2019. The court found that Durham cashed all but the
check for interest noting, “[I]t is undisputed that the full amount of the loan
was repaid to Mr. Durham and deposited in his account in October 2019. No
other money was exchanged between the parties to this action.”

[¶13] While acceptance of a check is not by itself conclusive of novation, there
were other circumstances surrounding the transaction cited by the district
court that supported its conclusion. The court noted that Integrity
Environmental was an existing company, formed in 2016 and operated only by
Andrea Vigen, whose “integral component of its business plan” involved her
membership with the Mandan, Hidatsa and Arikara Nation so that the
company would be a Certified Indian Company with Tier 1 authority to conduct
operations on the reservation. The court also noted that Fain Sr., Fain Jr., and
Durham did not participate in the management of Integrity Environmental,
that no shares or interests were ever issued to anyone but Andrea Vigen, and
that no bill of sale or assignment was ever drafted. Furthermore, much of the
contested issues in this case—whether formation rules were satisfied in the
signing of the original agreement or what terms the original agreement
included—are irrelevant in the context of the later novation. These findings
are consistent with our rationale in Jedco Dev. Co., Inc. in that a totality of
facts and circumstances in this case establish a novation agreed upon by all
parties. Furthermore, as established in Schmitt, the fact that both parties
disagree as to which company (Integrity or Integrity Environmental) was being
invested in during the signing of the original agreement is irrelevant given the
later novation creating a substitute arrangement.

[¶14] The district court’s findings satisfy the requirements of mutual assent
and sufficient consideration under N.D.C.C. § 9-13-09 and N.D. Pub. Serv.
Comm’n. After reviewing the record, we conclude the court’s findings were not


                                       5
induced by an erroneous view of the law, there is evidence in the record to
support the findings, and we are not left with a definite and firm conviction a
mistake has been made. The district court’s findings regarding the novation
are not clearly erroneous.

                                      III

[¶15] The district court’s findings related to a novation between the parties are
not clearly erroneous. We affirm the district court’s judgment.

[¶16] Jon J. Jensen, C.J.
      Gerald W. VandeWalle
      Daniel J. Crothers
      Lisa Fair McEvers
      Jerod E. Tufte




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