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Kreitzer v. Xethanol Corp.: US Distrct Court : CONTRACT | EMPLOYMENT - contract integrated; not ambiguous; expectation damages not reliance ones

Civil No. 08-14(DSD/JJK)
David A. Kreitzer,
Xethanol Corporation,
James H. Kaster, Esq., David E. Schleisinger, Esq. and
Nichols Kaster, PLLP, 80 South Eighth Street, Suite 4600,
Minneapolis, MN 55402, counsel for plaintiff.
Wallace G. Hilke, Esq. and Lindquist & Vennum, PLLP, 80
South Eighth Street, Suite 4200, Minneapolis, MN 55402
and Jeffrey L. Mapen, Esq., S. Wade Malone, Esq. and
Nelson, Mullins, Riley & Scarborough, LLP, 201 17th
Street N.W., Suite 1700, Atlanta, GA 30363, counsel for
This matter is before the court on defendant Xethanol
Corporations (Xethanol) motion for summary judgment. Based upon
a review of the file, record and proceedings herein, and for the
reasons stated, the court grants defendants motion.
This federal diversity action arises out of an employment
agreement between plaintiff David A. Kreitzer (Kreitzer) and
Xethanol. Xethanol specializes in the production of ethanol and
ethanol-related products. In March 2005, Kreitzer began discussing
1 Taylor and Bellone do not recall discussing with Kreitzer
the possibility of a cashless transaction. (Pl.s Ex. 10 at 29;
Ex. 11 at 28-30.)
a job opportunity with Chris Taylor (Taylor), Xethanols then
chief executive officer. Following up on this conversation,
Xethanols chief financial officer Larry Bellone (Bellone)
emailed Kreitzer a summary of the employment offer on March 3,
2005, proposing a 0,000 annual salary and a signing bonus of
50,000 warrants to purchase shares of Xethanol common [stock] at a
price per share of .00 any time during the 3 year period from the
date of the warrants. (Pl.s Ex. 1.) According to Kreitzer, at a
meeting on March 15, 2005, he informed Taylor and Bellone that he
could not afford to purchase the signing bonus shares. (Pl.s Ex.
9 at 52-53.) Taylor allegedly assured Kreitzer that he would be
able to flip the shares through a cashless transaction by using
a broker to purchase and sell them simultaneously.1 (Id. at 53.)
On April 6, 2005, Xethanol sent Kreitzer a written employment offer
stating that [u]pon acceptance of this offer, as a signing bonus,
the Company will issue to you options to purchase 50,000 shares of
Xethanol common stock at an exercise price of .00 per share.
These options will be exercisable any time during the three year
period following issuance. (Pl.s Ex. 3.) Kreitzer signed and
returned the agreement that day.
On April 5, 2006, Kreitzer informed Bellone that he had
retained stock broker Mason Matschke (Matschke) and wanted to
2 A company that intends to sell its stock must file a
registration statement with the Securities Exchange Commission.
See 15 U.S.C. 77e.
exercise his stock options through a cashless transaction. In an
April 11, 2006, email, Bellone told Kreitzer that the warrants were
not yet registered. Therefore, Kreitzer could purchase the shares
but he could not sell them.2 According to Kreitzer, this was the
first time anyone at Xethanol informed him that the shares were not
registered. Throughout the spring and summer of 2006, Kreitzer and
Matschke unsuccessfully urged Bellone to complete the necessary
paperwork to register the shares. Kreitzer resigned from his job
at Xethanol on November 7, 2006. At that time, the shares remained
On December 13, 2007, Kreitzer filed a five-count complaint
against Xethanol in Minnesota state court, asserting breach of
contract, breach of the implied covenant of good faith and fair
dealing, promissory estoppel, fraudulent misrepresentation and
negligent misrepresentation. Xethanol removed the action to this
court on January 2, 2008, and now moves for summary judgment.
I. Summary Judgment Standard
Rule 56(c) of the Federal Rules of Civil Procedure provides
that summary judgment is appropriate if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law. See Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986). A fact is material only when its
resolution affects the outcome of the case. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute is genuine if the
evidence is such that it could cause a reasonable jury to return a
verdict for either party. See id. at 252.
On a motion for summary judgment, all evidence and inferences
are to be viewed in a light most favorable to the nonmoving party.
See id. at 255. The nonmoving party, however, may not rest upon
mere denials or allegations in the pleadings but must set forth
specific facts sufficient to raise a genuine issue for trial. See
Celotex, 477 U.S. at 324. Moreover, if a plaintiff cannot support
each essential element of his claim, summary judgment must be
granted because a complete failure of proof regarding an essential
element necessarily renders all other facts immaterial. Id. at
II. Breach of Contract
Kreitzer maintains that Xethanol breached the employment
agreement by preventing him from exercising his signing bonus
shares through a cashless transaction. Xethanol argues that it did
not breach the agreement because Kreitzer could have purchased the
shares at any time and the parol evidence rule bars Kreitzer from
introducing evidence of any alleged prior oral agreement.
The parol evidence rule prohibits the admission of extrinsic
evidence of prior or contemporaneous oral agreements to vary,
contradict or alter the meaning of a contract when the parties have
reduced their agreement to an unambiguous, integrated writing. See
Alpha Real Estate Co. v. Delta Dental Plan, 664 N.W.2d 303, 312
(Minn. 2003) (quoting Hruska v. Chandler Assocs., Inc., 372 N.W.2d
709, 713 (Minn. 1985)). Where a written agreement is ambiguous or
incomplete, however, evidence of prior or contemporaneous oral
agreements tending to establish the intent of the parties is
admissible. Id. (quoting Gutierrez v. Red River Distrib., Inc.,
523 N.W.2d 907, 908 (Minn. 1994)).
A. Integration
Kreitzer first argues that the agreement is not fully
integrated. A written agreement is fully integrated when the
parties intend the writing to be a complete and exclusive statement
of the terms of their agreement. See Restatement (Second) of
Contracts 210 (2008); see also Taylor v. More, 263 N.W. 537, 539
(Minn. 1935) (If [the agreement] imports on its face to be a
complete expression of the whole agreement ... it is to be presumed
that the parties ... introduced into it every material item and
term.). A determination of whether a written agreement is fully
3 The written employment offer noted that it confirm[ed]
certain terms and conditions of [Xethanols] offer for employment.
(Pl.s Ex. 3.)
integrated is not made solely by an inspection of the writing
itself. See Alpha Real Estate Co., 664 N.W.2d at 312 (quoting
Bussard v. Coll. of St. Thomas, Inc., 200 N.W.2d 155, 161 (Minn.
1972)). Rather, the writing must be read in light of the
situation of the parties, the subject matter and purposes of the
transaction, and like attendant circumstances. Id.
Kreitzer contends that the absence of a merger clause
establishes that the agreement was not fully integrated.3 A merger
clause is a written statement that the contract contains the entire
agreement between the parties and that all prior negotiations and
agreements are merged into that agreement. See 29A Am. Jur. 2d
Evidence 1107 (2008); see also Alpha Real Estate Co., 664 N.W.2d
at 312 (merger clause establishes that parties intended writing to
be an integration of agreement). The absence of a merger clause,
however, does not necessarily permit consideration of parol
evidence. See Minn. Teamsters Pub. & Law Enforcement Employees
Union v. County of St. Louis, 726 N.W.2d 843, 848 (Minn. Ct. App.
2007); see also 29A Am. Jur. 2d Evidence 1107 (2008) (Presence
of integration clause makes the final written agreement no more
integrated than does the act of embodying the complete terms into
the writing.)
Here, the agreement governed the terms of Kreitzers
employment at Xethanol, specifying the title of his new position,
the amount of his salary, his payment schedule, his eligibility for
discretionary bonuses, the signing bonus, his ability to enroll in
the company sponsored healthcare plan, certain obligations Kreitzer
owed to his former employer and nondisclosure provisions upon
termination of Kreitzers employment. (Pl.s Ex. E.) This level of
detail indicates that the agreement was fully integrated. See
Tuaolo v. Want Some Weather Inc., Nos. A07-2139, A08-0014, A08-
0044, 2008 WL 5136614, at *3 (Minn. Ct. App. Dec. 9, 2008)
(agreement integrated despite lack of merger clause because
sufficiently detailed).
Nevertheless, Kreitzer also maintains that the absence of
legal counsel precludes a finding of integration. The terms of the
agreement, however, were detailed and clear, and Kreitzer accepted
the offer without requesting any modifications. Cf. Cers v.
Schmitz, No. C5-01-882, 2002 WL 47784, at *4 (Minn. Ct. App. Jan.
15, 2002) (lack of representation only one factor in assessing
integration). Therefore, the court determines that the agreement
was fully integrated and parol evidence is inadmissible to alter or
modify its terms unless the terms are ambiguous.
B. Ambiguity
Kreitzer argues that the agreement is ambiguous because it
neither specifies nor limits how he could exercise the stock
options. According to Kreitzer, there are at least three methods
of exercising stock options: paying cash, swapping company stock or
engaging in a cashless transaction. (Pl.s Ex. E.) Kreitzer
contends that the agreements use of the word exercise entitled
him to a cashless transaction. Xethanol maintains that the
agreement unambiguously provided Kreitzer with the right only to
purchase the shares.
A contract is ambiguous when the language used is reasonably
susceptible to more than one meaning. See Blattner v. Forster,
322 N.W.2d 319, 321 (Minn. 1982) (citation omitted). Whether a
contract is ambiguous is a legal question to be determined by the
court. Id. A court may consider acts in performance of a contract
to determine its meaning and ascertain the parties intent. See
Leslie v. Minneapolis Teachers Ret. Fund Assn, 16 N.W.2d 313, 315-
16 (Minn. 1944); see also Transp. Indem. Co. v. Dahlen Transp.
Inc., 161 N.W.2d 546, 549 (Minn. 1968); Cut Price Super Mkts. v.
Kingpin Foods, Inc., 98 N.W.2d 257, 268 (Minn. 1959).
In this case, the employment agreement did not contemplate
Kreitzers sale of the shares or a cashless transaction. Rather,
the agreements operative language gave Kreitzer the option to
purchase the shares. The terms exercise price and exercisable
must be interpreted in light of this language, which indicates that
Kreitzers rights were limited to the right to purchase the shares.
See Motorsports Racing Plus, Inc. v. Arctic Cat Sales, Inc., 666
N.W.2d 320, 324 (Minn. 2003) (Intent is ascertained, not by a
process of dissection in which words or phrases are isolated from
their context, but rather from a process of synthesis in which
words and phrases are given a meaning in accordance with the
obvious purpose of the contract. (citation omitted)). Moreover,
the parties subsequent conduct supports this interpretation.
Kreitzer expressed his desire for a cashless transaction in his
April 5, 2006, email, and Bellone responded that such a transaction
was impossible because the shares were not registered. Thereafter,
Bellone did not register the shares despite Kreitzer and Matschkes
entreaties. These actions do not evince the parties mutual intent
to guarantee Kreitzers right to a cashless transaction.
Accordingly, the court determines that the term exercise is
unambiguous, and the agreement guaranteed only Kreitzers right to
purchase the shares.
Anticipating this conclusion, Kreitzer argues that the parties
modified the agreement to assure his right to a cashless
transaction. A court may consider evidence of subsequent oral
modifications to a written contract. Sokol & Assocs., Inc. v.
Techsonic Indus., Inc., 495 F.3d 605, 610 (8th Cir. 2007) (citing
Larson v. Hills Heating & Refrig. of Bemidji, 400 N.W.2d 777, 781
(Minn. Ct. App. 1987)). However, allegations of modifications
inconsistent with the written terms of a contract are subject to
rigorous examination. Id. at 610-11 (quoting Bolander v.
Bolander, 703 N.W.2d 529, 541-42 (Minn. Ct. App. 2005)). In other
words, such modifications must be shown by clear and convincing
evidence. Bolander, 703 N.W.2d at 542 (citing Dwyer v. Ill. Oil
Co., 252 N.W. 837 (Minn. 1934)). Here, no evidence supports a
modification of the agreement to guarantee Kreitzers right to a
cashless transaction. Accordingly, summary judgment on Kreitzers
breach of contract claim is warranted.
III. Implied Covenant of Good Faith and Fair Dealing
Kreitzer claims that Xethanol breached the agreements implied
covenant of good faith and fair dealing by refusing to file the
registration form that would have allowed him to simultaneously
purchase and sell his shares. An implied covenant of good faith
and fair dealing prohibits one party from unjustifiably hindering
the other partys performance of a contract. In re Hennepin County
1986 Recycling Bond Litig., 540 N.W.2d 494, 502 (Minn. 1995).
Minnesota courts, however, have not extended this doctrine to
employment agreements. See Poff v. W. Nat. Mut. Ins. Co., 13 F.3d
1189, 1191 (8th Cir. 1994) (The Minnesota Supreme Court has
squarely held that there is no implied covenant of good faith and
fair dealing in Minnesota employment contracts.); Hunt v. IBM Mid
Am. Employees Fed. Credit Union, 384 N.W.2d 853, 858 (Minn. 1986)
(We have not read an implied covenant of good faith and fair
dealing into employment contracts.) Therefore, the court
determines that the employment agreement did not include a covenant
of good faith and fair dealing and Kreitzers claim fails as a
matter of law.
IV. Promissory Estoppel, Fraudulent Misrepresentation and
Negligent Misrepresentation
Kreitzer asserts promissory estoppel, fraudulent
misrepresentation and negligent misrepresentation claims on the
basis that Taylor knew that Kreitzers signing bonus shares were
not registered but nevertheless assured him he could engage in a
cashless transaction. In order to succeed on these claims,
Kreitzer must submit evidence of reliance damages. See Hoyt
Props., Inc. v. Prod. Res. Group, L.L.C., 736 N.W.2d 313, 318
(Minn. 2007) (fraudulent misrepresentation requires proof of
reliance damages); Martens v. Minn. Min. & Mfg. Co., 616 N.W.2d
732, 746 (Minn. 2000) (promissory estoppel claim requires proof of
reliance damages); Smith v. Brutger Cos., 569 N.W.2d 408, 414 n.3
(Minn. 1997) (negligent misrepresentation claim requires proof of
reliance damages). As a general rule, such damages are measured by
a plaintiffs out-of-pocket loss. See Lewis v. Citizens Agency of
Madelia, Inc., 235 N.W.2d 831, 835 (Minn. 1975). A court
determines out-of-pocket loss by measuring the difference between
what plaintiff parted with and what he received. Id. Thus, the
out-of-pocket rule assumes that plaintiff received something from
defendant that was less than what plaintiff anticipated receiving.
See Autrey v. Trkla, 350 N.W.2d 409, 412 (Minn. Ct. App. 1984).
Kreitzer argues that he suffered damages due to Taylors
alleged misrepresentation because he was unable to conduct the
cashless transaction and that he is entitled to the difference
between the market price and the exercise price on the 50,000
shares. Such damages are expectation damages that do not
ordinarily satisfy the out-of-pocket rule. See Wilhelm Lubrication
Co. v. Brattrud, 268 N.W. 634, 636-37 (Minn. 1936) (expectation
damages place plaintiff in same position as if breaching party had
complied with contract); see also 22 Am. Jur. 2d Damages 46
(2008). Minnesota courts, however, recognize exceptions to the
out-of-pocket rule where strict application of the rule may not
return the plaintiff to the status quo. See B.F. Goodrich Co. v.
Mesabi Tire Co., 430 N.W.2d 180, 183 (Minn. 1988); Jensen v.
Peterson, 264 N.W.2d 139, 143 (Minn. 1978). In such cases, the
plaintiff may recover for any economic injury that is the direct
and natural consequence of having acted in reliance on the
misrepresentation. See Lewis, 235 N.W.2d at 835-36 (expectation
damages awarded because loss suffered was expected life insurance
proceeds not premiums already paid). Exceptions to the out-ofpocket
rule have been allowed only where the defendants
misrepresentation prevents the plaintiff from taking measures to
protect the value of property he already owned. Compare B.F.
Goodrich Co., 430 N.W.2d at 183 (exception applies when
misrepresentation caused plaintiff to lose established business),
and Hughes v. Sinclair Mktg. Inc., 389 N.W.2d 194, 199 (Minn. 1986)
(same), and Sports Page, Inc. v. First Union Mgmt., Inc., 438
N.W.2d 428, 432 (Minn. Ct. App. 1989) (same), with Butler Gen.
Store, Inc. v. Binger, No. C3-93-817, 1994 WL 6854, at *3 (Minn.
Ct. App. Jan. 11, 1994) (expectation damages not allowed when
alleged misrepresentation did not harm preexisting business). See
generally Johnson Bldg. Co. v. River Bluff Dev. Co., 374 N.W.2d
187, 196 (Minn. Ct. App. 1985) (narrowly construing exception to
out-of-pocket rule). Kreitzers claim does not fall within this
exception. Accordingly, the court determines that Kreitzer has not
established reliance damages and summary judgment is warranted on
these claims.
Based upon the file, record and proceedings herein, and for
the reasons stated, IT IS HEREBY ORDERED that defendants motion
for summary judgment [Doc. No. 40] is granted.
Dated: January 16, 2009
s/David S. Doty
David S. Doty, Judge
United States District Court


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