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American Prairie Construction Co. v. Tri-State Financial, LLC: BANKRUPTCY | CIVIL PROCEDURE | CONTRACT - issues stayed by bankruptcy; no abuse not recusing, especially on untimely motion; claimed settlement contract questions

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
Nos. 08-1288/1292/1394
___________
American Prairie Construction *
Company, formerly known as North *
Central Construction, Inc., *
*
Appellee/Cross-Appellant, *
* Appeals from the United States
v. * District Court for the
* District of South Dakota.
John Hoich, *
*
Appellant/Cross-Appellee, *
*
v. **
Tri-State Financial, LLC, *
*
Appellant/Cross-Appellee. *
__________
Submitted: November 12, 2008
Filed: March 24, 2009
___________
Before MURPHY, RILEY, and GRUENDER, Circuit Judges.
___________
RILEY, Circuit Judge.
Tri-State Financial, LLC (TSF) and John Hoich (Hoich) appeal the district
courts finding that TSF and Hoich were parties to a binding settlement agreement
1NCC was later renamed American Prairie Construction Co., but has continued
to use the name NCC throughout this litigation.
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formed with North Central Construction, Inc. (NCC)1 on June 21, 2004, during
bankruptcy proceedings for Tri-State Ethanol (TSE). The district court found TSF
and Hoich breached the agreement and were jointly and severally liable to NCC in the
amount of .5 million. For reasons discussed below, this opinion addresses only
Hoichs claims on appeal, and we reverse the district courts judgment as to Hoich.
I. BACKGROUND
A. Tri-State Ethanol Bankruptcy Proceedings
Throughout 2001, NCC built an ethanol plant in Rosholt, South Dakota.
Although TSE was the plant owner, NCC retained a million equity interest in the
plant. The plant began operations in 2002, but was not profitable. When TSE failed
to pay NCC for construction of the plant, NCC filed a mechanics lien against the
property on December 31, 2002, and initiated foreclosure proceedings in South
Dakota state court. On that same date, an explosion occurred at the plant while the
plant was shut down for repairs. TSE claimed it was unable to obtain further
financing for the plant due to NCCs mechanics lien, and in May 2003, TSE filed a
Chapter 11 bankruptcy petition in the Bankruptcy Court for the District of South
Dakota. NCCs state foreclosure action was stayed by the bankruptcy petition filing.
In the course of the bankruptcy proceedings, TSE listed NCC as an unsecured
nonpriority creditor with a claim consisting of ,712,253 for construction costs. In
response, NCC filed an adversary action in the bankruptcy court on July 14, 2003, to
determine the validity, priority, and extent of its liens, claiming a priority secured
claim for unpaid construction fees in the amount of ,611,883.
In June 2003, a group of investors formed TSF, a shell-corporation which was
designed solely to provide funding to TSE in an effort to return the ethanol plant to
operation. On September 25, 2003, TSE filed a motion in the bankruptcy action
seeking court approval of post-petition financing, in which TSF would provide TSE
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with million for plant improvements, but only if TSFs financing would be treated
as a secured priority claim. On October 22, 2003, TSEs motion was heard in the
bankruptcy court. In support of the post-petition financing motion, Hoich, an investor
in both TSE and TSF, testified he had a net worth of to million and he could
personally guarantee funds for the planned improvements, if his investment were
given priority. Hoich clarified, however, he was only willing to guarantee funding for
future improvements, and not for the payment of other creditors, adding he personally
already had lost .5 million. The bankruptcy court denied the motion on December
12, 2003. Nevertheless, TSF provided funds to TSE for plant improvements without
the bankruptcy courts knowledge.
In March 2004, TSE filed a Modified Chapter 11 Plan. NCC, along with
creditor Interstate Electric and Engineering Company (Interstate), objected to their
treatment under the plan. The plan provided NCCs construction claim would be
treated as a Class 12 unsecured non-priority claim to be paid over 10 years, and
NCCs million equity claim would receive no distribution. TSF contends NCC and
Interstates opposition was the major hurdle to confirmation of the modified plan.
B. Settlement Discussions
After TSE filed its modified plan, the United States Bankruptcy Trustee
(Trustee) filed a motion to dismiss the Chapter 11 bankruptcy, or in the alternative,
to convert the Chapter 11 to a Chapter 7 bankruptcy. A hearing was scheduled for
June 21, 2004, to address plan confirmation and the motion to dismiss. The scheduled
hearing prompted a meeting on June 14, 2004, between TSF representatives Hoich,
David Ruback (Ruback), Joe Vacanti, and others, and NCC representatives Peter
Rudeen (Rudeen), NCCs CEO, and Ace Brant, NCCs owner. Hoich represented
TSF in the settlement discussions. TSFs goal was to negotiate an agreement in which
TSF could purchase NCCs claims against the bankruptcy estate, eliminating
objections to the modified plan and allowing the plan to be approved at the June 21,
2004 hearing. No agreement was reached on June 14, 2004.
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Hoich and Rudeen continued settlement negotiations in a series of telephone
conversations between Friday, June 18, through Sunday, June 20, 2004. Hoich was
in close contact with other TSF representatives during this time, including Ruback,
TSFs manager at the time, and James Jandrain (Jandrain), a certified public
accountant who performed many services for TSF throughout the bankruptcy
proceedings. After Hoich spoke with Ruback and Jandrain, they decided Hoich would
offer NCC .5 million in exchange for NCCs claims and interests in TSE. Hoich
offered Rudeen this deal on the evening before the confirmation hearing, but it was
not made clear who would provide the funds. The following morning, June 21, 2004,
shortly before the hearing commenced, Rudeen called Hoich and accepted the offer.
Hoich did not attend the June 21 hearing. Several other TSF representatives
traveled from Omaha, Nebraska, to Sioux Falls, South Dakota, for the hearing,
including Ruback, Jandrain, and TSFs newly hired attorney, Jerrold Strasheim
(Strasheim). Before the hearing, TSF representatives met with NCC attorney Ron
Hall (Hall) and others to discuss how the settlement should be structured. Interstate
representatives were also present for the discussions. Throughout the meeting, Hall
took notes on a legal pad and passed the notes around for others to review.
Shortly after the meeting, the confirmation hearing commenced. Hall read his
notes into the record and indicated, with no objection, that his notes represented the
settlement agreement among TSF, Interstate, and NCC. Several parties were present,
including at least sixteen attorneys, and a significant amount of confusion existed
about the terms of the agreement. Strasheim, newly representing TSF, seemed
confused about who he was representing in the course of the hearing, stating, Your
Honor, on behalf of Interstate, I would say that that is the deal. Strasheim was then
interrupted and reminded he was representing TSF, not Interstate. At another point
in the proceeding, Hall stated Strasheim did not represent Hoich, but it [was his]
understanding that Mr. Hoych [sic] personally committed to this deal, and added,
Jandrain is here to confirm that. Jandrain, who was in the gallery, was never asked
-5-
to confirm whether Hoich had agreed to be bound personally under the settlement
agreement.
The terms of the settlement agreement read into the record cannot easily be
summarized. TSF agreed to purchase the various claims of NCC and Interstate for
.5 million, with 5,000 payable to Interstate. The alleged agreement also
contained provisions stating NCC and Interstate would not object to TSEs plan
confirmation. The reading detailed which claims were being purchased and from
which class the claims could be found in TSEs Chapter 11 bankruptcy plan. There
was also a provision allowing Interstate to retain one of its claims which was to be
paid by TSEs bankruptcy estate over a period of three years.
At the conclusion of the June 21, 2004 hearing, the bankruptcy court requested
an amended plan be filed by June 25, 2004, in an effort to expedite the process. The
court scheduled a confirmation hearing for the amended plan on July 28, 2004.
Before the confirmation hearing took place, the parties began to discuss the settlement
agreement, and to exchange drafts of proposed documents, in an effort to memorialize
the settlement discussed during the June 21, 2004 hearing. Conflicts arose when TSF
claimed the agreement was subject to confirmation of the amended plan. NCC
vehemently denied the existence of such a condition. In the meantime, TSF raised
.5 million from investors and deposited the money into a trust account with
Strasheims law firm. Hoich did not contribute to these funds.
When NCC and TSF failed to agree on the written terms for the formal
agreement, NCC filed a motion on July 14, 2004, asking the bankruptcy court to
enforce the June 21, 2004 agreement. NCC and Interstate also filed new objections
to plan confirmation and ballots rejecting the modified plan in the event TSF failed
to perform under the agreement. The motion to approve the settlement agreement and
the motion to confirm the modified plan were heard on July 27, 2004.
-6-
Shortly before the hearing, NCC attempted to perform its obligations under the
settlement agreement by tendering to TSF an assignment of its claims against, and
its interests in, TSE. TSF and Hoich declined to accept the tendered assignment and
refused to pay NCC. When the hearing convened, TSE and TSF did not pursue
confirmation of TSEs modified plan, but instead, joined in a pending motion by the
Trustee asking the court to dismiss the Chapter 11 proceedings. The bankruptcy court
denied the motion to dismiss and instead converted TSEs Chapter 11 reorganization
to a Chapter 7 liquidation.
The bankruptcy court also denied NCCs motion to approve the settlement
agreement, finding the settlement agreement was not conditional in any manner. The
court noted the parties disagreed as to whether a meeting of the minds occurred, but
the court concluded it did not have jurisdiction to force TSF, a third party not directly
involved in the bankruptcy, to consummate a deal. TSF returned the .5 million,
which had been placed in a trust account, to the contributors.
C. The Present Contract Action
Approximately one week after the bankruptcy courts ruling, NCC filed the
present lawsuit in federal district court seeking to enforce the alleged settlement
agreement against TSF and Hoich. The district court stayed the action several times
as the parties attempted to reach a settlement in bankruptcy court. At the same time,
TSEs assets were being sold, and secured creditors and priority administrative
expenses were being paid from the bankruptcy estate.
While the action was stayed, a magistrate unsuccessfully attempted to mediate
a second settlement agreement between NCC and TSF. Almost a year later, on June
12, 2006, a third settlement agreement on NCCs claim for construction costs was
negotiated between the Trustee and NCC. TSF was not a party to this agreement. The
terms of the settlement were: (1) the Trustee would pay million, plus interest, to
NCC; (2) NCC would release all claims pending in the bankruptcy proceeding, except
-7-
its million equity claim; and (3) NCC would dismiss its state court foreclosure
action. The bankruptcy court granted the Trustees motion to approve the settlement
agreement, but by that time, the district court had lifted the stay in the present case and
set a trial date. As a result, the bankruptcy court was unable to enforce the settlement
agreement between the Trustee and NCC.
The present contract action proceeded to trial on August 1, 2007. The district
court issued an opinion and order on December 27, 2007, holding the original
settlement agreement, read into the bankruptcy court record on June 21, 2004, was a
binding and enforceable agreement which was breached by TSF and Hoich when they
failed to perform. The district court awarded NCC .5 million in damages, plus prejudgment
interest, for which TSF and Hoich were jointly and severally liable. The
award was later reduced to ,025,000, plus interest, pursuant to a stipulation
previously made by NCC. TSF and Hoich appealed the findings of the district court,
and NCC cross-appealed.
II. DISCUSSION
A. Bankruptcy Stay
On November 12, 2008, counsel for TSF, Hoich, and NCC orally presented
their arguments to this court. After that date, TSF filed bankruptcy. Generally, when
a party files a Chapter 11 bankruptcy petition, all proceedings against the debtor are
stayed. See 11 U.S.C 362(a). Whether a proceeding is deemed to be against the
debtor is ascertained from an examination of the debtors status at the initial
proceeding. Farley v. Henson, 2 F.3d 273, 275 (8th Cir. 1993) (quoting Cathey v.
Johns-Manville Sales Corp., 711 F.2d 60, 62 (6th Cir. 1983)). The initial contract
action was brought by NCC against TSF and Hoich. Consequently, this proceeding
is stayed automatically as to the issues presented by TSF on appeal and the issues
raised by NCC in its cross-appeal until further order by the bankruptcy court.
-8-
This stay does not extend to Hoichs issues on appeal. It is well-established
that stays pursuant to 362(a) are limited to debtors and do not encompass nonbankrupt
co-defendants. Teachers Ins. and Annuity Assn of Am. v. Butler, 803 F.2d
61, 65 (2d Cir. 1986) (listing cases). In Croyden Assocs. v. Alleco, Inc., 969 F.2d
675, 677 (8th Cir. 1992) (quoting Maritime Elec. Co. v. United Jersey Bank, 959 F.2d
1194, 1205 (3d Cir. 1992)), our court was persuaded that the stay required by section
362 should extend only to claims against [the debtor], and that the stay is not available
to nonbankrupt codefendants, even if they are in a similar legal or factual nexus with
the debtor. We proceed with only those issues raised by Hoich.
Hoich maintains the district court erred when it (1) denied Hoichs motion for
recusal and disqualification; (2) found Hoich was a party to the June 21, 2004
agreement; (3) found Hoich personally guaranteed the June, 21, 2004 agreement; and
(4) improperly took judicial notice of certain documents.
B. Motion for Recusal and Disqualification
We review a denial of a motion to recuse for an abuse of discretion. Trammel
v. Simmons First Bank of Searcy, 345 F.3d 611, 612 (8th Cir. 2003) (citation
omitted). Pursuant to 28 U.S.C. 455(a), [a]ny justice, judge, or magistrate judge
of the United States shall disqualify himself in any proceeding in which his
impartiality might reasonably be questioned. A judge is also required to recuse
himself when he has a personal bias or prejudice concerning a party, or personal
knowledge of disputed evidentiary facts concerning the proceeding. 28 U.S.C.
455(b)(1). We apply an objective standard of reasonableness in determining
whether recusal is required. Under 455(a), disqualification is required if a
reasonable person who knew the circumstances would question the judges
impartiality, even though no actual bias or prejudice has been shown. Fletcher v.
Conoco Pipe Line Co., 323 F.3d 661, 664 (8th Cir. 2003) (quoting United States v.
Tucker, 78 F.3d 1313, 1324 (8th Cir. 1996)).
-9-
A judge is presumed to be impartial, and the party seeking disqualification
bears the substantial burden of proving otherwise. United States v. Denton, 434
F.3d 1104, 1111 (8th Cir. 2006) (citing Fletcher, 323 F.3d at 664). In order to
establish bias or prejudice from in court conduct, a party must show the judge had
a disposition so extreme as to display a clear inability to render a fair judgment.
Id. (quoting Liteky v. United States, 510 U.S. 540, 551 (1994)). [O]pinions formed
by the judge on the basis of facts introduced or events occurring in the course of the
current proceedings, or of prior proceedings, do not constitute a basis for a bias or
partiality motion unless they display a deep-seated favoritism or antagonism that
would make fair judgment impossible. Id. (quoting Liteky, 510 U.S. at 555).
Before a trial date was set, the district court heard various appeals arising out
of the underlying bankruptcy proceedings. Hoich claims two of the district courts
opinions in the bankruptcy appeals demonstrate the court pre-determined whether a
binding agreement was formed on June 21, 2004. In one opinion, the district court
stated,
We know that TSF and [NCC ] . . . reached a settlement in the presence
of the bankruptcy judge which was on the record in June of 2004. This
was followed by TSF reneging on the settlement by adding terms not
previously stated. The bankruptcy judge did not enforce the settlement
and allowed TSF to escape from it. Of course, this would be frustrating
to any judge.
After Hoich filed a motion asking the district judge to recuse himself, the
district judge responded in an opinion thoroughly addressing Hoichs concerns. The
judge admitted he erred in stating that settlements had been reached, and continued
by resolving, they may or may not have been reached and the trial of this action will
answer that question. American Prairie Const. Co. v. Tri-State Financial, LLC, No.
04-1016, 2007 WL 2156615, at *6 (D.S.D. July 25, 2007).
2Refereeing heated advocacy can be frustrating and irritating for the trial judge,
who is human afterall, and who is likely to form strong opinions regarding counsel,
parties, and witnesses. Forming judicial opinions on credibility concerning parties
-10-
The district courts appellate opinions were based on facts and evidence derived
from the related bankruptcy proceedings. Hoich now has the burden of proving the
district court display[ed] a deep-seated favoritism or antagonism that would make
fair judgment impossible. Liteky, 510 U.S. at 555. Hoich cannot meet this burden.
The district judge admitted an error in stating a settlement had been reached, but the
statements in the district courts opinions and in the transcripts do not demonstrate a
deep-seated favoritism or antagonism, nor do the statements display a disposition
so extreme as to render fair judgment impossible. Id. The district court did not abuse
its discretion in denying Hoichs motion for recusal and disqualification.
In addition, Hoichs motion for recusal was not timely filed. We have
repeatedly held, a claim for judicial recusal under section 455 will not be considered
unless timely made. Fletcher, 323 F.3d at 664 (quoting United States v. Bauer, 19
F.3d 409, 414 (8th Cir. 1994)). For such a motion to be considered timely, the party
must bring its motion at the earliest possible moment after obtaining knowledge of
facts demonstrating the basis for such a claim. Id. (quoting Apple v. Jewish Hosp.
& Med. Ctr., 829 F.2d 326, 333 (2d Cir. 1987)).
Hoich filed his recusal motion on June 21, 2007, less than six weeks before
trial. Hoich argues, because he was not a party to the bankruptcy proceedings,
Hoichs counsel did not learn of the district courts opinions upon which his motion
was based until June 3, 2007. However, Hoich played a prominent role throughout
the bankruptcy proceedings and should have been monitoring the case status.
The district courts findings regarding the untimeliness of Hoichs recusal
motion were not clearly erroneous. The recusal motion was properly denied by the
district court.2
and their counsel is expected; in fact, necessary. This record does not reflect any
prejudice or bias or any inability to render a fair, impartial judgment on the part of the
district judge.
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C. Hoichs Liability Under the Settlement Agreement
The district court concluded Hoich was a principal in a settlement agreement
formed between TSF, Hoich, Interstate, NCC, and TSE on June 21, 2004, in TSEs
bankruptcy proceedings. See American Prairie Const. Co. v. Tri-State Financial,
LLC, 529 F. Supp. 2d 1061, 1080 (D.S.D. 2007). In the alternative, the district court
found Hoich made a personal financial commitment to guarantee the payment of the
settlement proceeds. Id. at 1078, 1080. Hoich appeals each of these findings.
1. Guarantor Liability
NCC did not claim, either in its complaint or at trial, Hoich was a guarantor of
the settlement agreement. The district court held, sua sponte, Hoich was a guarantor.
Hoich claims the district court erred by doing so, citing Armstrong Cork Co. v. Lyons,
366 F.2d 206, 208 (8th Cir. 1966) (quoting Sylvan Beach v. Koch, 140 F.2d 852, 861
(8th Cir. 1944)), which states,
A court may not, without the consent of all persons affected, enter a
judgment which goes beyond the claim asserted in the pleadings. Unless
all parties in interest are in court and have voluntarily litigated some
issue not within the pleadings, the court can consider only the issues
made by the pleadings, and the judgment may not extend beyond such
issues nor beyond the scope of the relief demanded.
The purpose of this rule is to assure to every person his day in court before judgment
is pronounced against him. Id. (quoting Sylvan Beach, 140 F.2d at 862). NCC did
not plead or pursue this guarantee claim to put Hoich on notice of the allegation as the
3We apply the law of South Dakota because: (1) if a contract for a guarantee
was formed, it was formed in South Dakota where the settlement hearing took place,
(2) any contract would have been performed in South Dakota, and (3) the parties make
clear their understanding that South Dakota law governs the dispute by citing
primarily South Dakota law in their briefs. See Robert A. Brazener, Annotation,
Conflict of Laws: What Law Governs Validity and Construction of Written Guaranty,
72 A.L.R.3d 1180 (1976).
-12-
law requires. Regardless, the facts do not support the district courts finding of
guarantor liability.
Under South Dakota law,3 [a] guaranty is a promise to answer for the debt,
default, or miscarriage of another person. S.D. Codified Laws 56-1-1. Except as
prescribed by 56-1-5 to 56-1-9, inclusive, a guaranty must be in writing and signed
by the guarantor. S.D. Codified Laws 56-1-4. Thus, to be valid[,] a guarantee
must either be in writing or must be of a type that can be equated with one of the
[statutory] exceptions. Cargill, Inc. v. American Pork Producers, Inc., 426 F. Supp.
499, 509-10 (D.S.D. 1977).
The district court held Hoich made a personal financial commitment to
guarantee the payment of the settlement proceeds, and [t]hat commitment was
reduced to writing when it was read onto the record. American Prairie Const. Co.,
529 F. Supp. 2d at 1078. We disagree. Hoich did not sign a written contract to
guarantee the settlement agreement. Hoich was not present at the June 21, 2004
hearing, and could not have made a personal financial commitment on the record. At
no time during the hearing did any agent on behalf of Hoich expressly represent Hoich
was guaranteeing the alleged settlement agreement. Hoich can only be liable if the
alleged guarantee falls under one of the enumerated statutory exceptions.
The district court declared, Even if not entered into the record, NCC agreed
to part with the value of its claims, and did tender its claims, under circumstances such
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as to render Hoich a guarantor. Id. To support this finding, the district court cited
S.D. Codified Laws 56-1-6, which states,
A promise to answer for the obligation of another is deemed an original
obligation of the promiser and need not be in writing where the creditor
parts with value or enters into an obligation, in consideration of the
obligation in respect to which the promise is made, in terms or under
circumstances such as to render the party making the promise the
principal debtor, and the person in whose behalf it is made his surety.
The theory embodied in the quoted statute . . . [is] essentially . . . that one who
purports to guarantee a debt and does so in such a manner as to make himself the
principal debtor, shall be held liable on the debt even though the debt was not
guaranteed by a writing. Cargill, 426 F. Supp. at 510. To prove the applicability of
this exception, the plaintiff is obliged to prove the following: (1) that plaintiff
became a creditor by parting with something of value; (2) that the defendant promised
to answer for the obligation created; and (3) that the circumstances were such as to
render the promisor the principal debtor. Id.
NCC did not present any evidence to satisfy these requirements. First, NCC did
not part with anything of value on June 21, 2004. NCC did not part with any value
until a month later when NCC attempted to tender performance by releasing its claims
shortly before the confirmation hearing on July 27, 2004. By then, NCC knew Hoich
denied guaranteeing the alleged settlement.
Second, there is no evidence Hoich agreed to answer for any obligation created
between NCC and TSF. The district court stated, Hoich had, under oath, previously
testified that he himself would make sure that cash would be available to TSF to pay
its obligations. American Prairie, 529 F. Supp. 2d at 1077. This is an inaccurate
statement of Hoichs testimony. Hoich agreed, in the bankruptcy proceeding, to
provide funds to TSF for the sole purpose of assisting TSE in making planned
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improvements to TSEs ethanol plant. Hoich then explicitly refused to guarantee
payment to any other creditors.
The district court continued, Without Hoichs participation, no settlement was
possible, given the fact that TSF was an entity with no assets and no ability to pay
anything. Id. The record suggests TSF did have assets and the ability to pay under
the agreement because TSF later raised the .5 million for the settlement from
investors other than Hoich. Neither the district court nor NCC identify any evidence
to support the claim Hoich personally agreed to answer for TSFs obligations.
Finally, because NCC did not part with anything of value on June 21, 2004, and
because Hoich did not agree to be liable personally, the circumstances did not render
Hoich the principal debtor. The exception to the writing requirement in S.D. Codified
Laws 56-1-6 was not satisfied, and the district court erred in finding Hoich agreed,
in writing or otherwise, to be a guarantor.
2. Principal Liability
Our next inquiry is whether Hoich was a party to the settlement agreement. In
its opinion, the district court declared, Hoich is liable as a principal in the settlement
agreement only if [NCC] can show that Jandrain had ostensible (apparent) authority
to bind Hoich on the record. American Prairie, 529 F. Supp. 2d at 1077. The district
court concluded,
Hoich caused and allowed Rudeen to believe that Jandrain had the
authority to bind Hoich at the June 21, 2004, hearing. Hoich was himself
a principal obligor in the agreement to purchase NCCs claims against
the TSE bankruptcy estate by virtue of his acts and the acts of his
ostensible or actual agent, Jandrain.
Id.
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We review a district courts findings that a party entered into a settlement
agreement for clear error. See Chaganti & Assocs., P.C. v. Nowotny, 470 F.3d 1215,
1221 (8th Cir. 2006) (citation omitted). Whether an agency relationship exists is a
mixed question of law and fact.
When the facts relied upon to establish the existence of an agency
are undisputed, and conflicting inferences cannot be drawn from them,
the question of the existence of an agency is one of law for the court. On
the other hand, when the facts pertaining to the existence of an agency
are conflicting, or conflicting inferences may be drawn from the
evidence, the question is one of fact for the jury, or for the court as the
trier of fact if the case is tried without a jury.
3 Am. Jur. 2d Agency 352. South Dakota courts have held,In the law of agency,
a principal will be liable for contracts made in its behalf by an agent if the agent was
authorized to enter into the agreements. Federal Land Bank of Omaha v. Sullivan,
430 N.W.2d 700, 701 (S.D. 1988) (citations omitted). This authority may be actual
or ostensible. Id.
Actual authority is created by manifestations from the principal to the agent,
[S.D. Codified Laws] 59-3-2, while ostensible authority is created when the
principal allows a third person to believe the agent has authority to act on the
principals behalf [, S.D. Codified Laws] 59-3-3. Id.; see also S.D. Codified Laws
59-1-5 (Agency is ostensible when by conduct or want of ordinary care the
principal causes a third person to believe another, who is not actually appointed, to be
his agent.). In reality, an ostensible agency is not a true agency relationship. See
Federal Land Bank of Omaha, 430 N.W.2d at 701. Instead, it is based entirely on an
estoppel. Id. (citations omitted).
[W]here it appears that the principal knew, or by a proper supervision of
the affairs of the agency ought to have known, of the acts of the agent,
or the general course and manner in which he was conducting the
-16-
business of the agency, he is estopped as against innocent third persons
from denying the power of the agent to act.
Baldwin v. National College, 537 N.W.2d 14, 18 (S.D. 1995) (quoting Federal Land
Bank of Omaha, 430 N.W.2d at 701).
Ostensible agency for which a principal may be held liable must be traceable
to the principal and cannot be established solely by the acts, declarations, or conduct
of an agent. Kasselder v. Kapperman, 316 N.W.2d 628, 630 (S.D. 1982) (citation
omitted). Once ostensible agency is determined, the principal is bound by the acts
of his agent to only those persons who have in good faith, and without negligence,
incurred a liability or parted with value upon the faith thereof. Dahl v. Sittner, 429
N.W.2d 458, 462 (S.D. 1988) (quoting S.D. Codified Laws 59-6-3). The third
person dealing with the agent, therefore, must show not only damages resulting from
his reliance on the appearance of authority, but also reasonable diligence and prudence
in ascertaining the fact of the agency and the nature and extent of the agents
authority. Id. (citation omitted). When the existence of an agency relationship is
denied, the burden of proof is upon the party who affirms its existence. Kasselder,
316 N.W.2d at 630 (citation omitted).
Thus, in order to determine if Jandrain was Hoichs ostensible or apparent agent
at the settlement hearing, we must determine whether Hoich engaged in conduct
which caused NCC representatives reasonably to believe, in good faith, and without
negligence, Jandrain had authority to bind Hoich. Dahl, 429 N.W.2d at 462. In the
days before the hearing on June 21, 2004, Hoich represented TSF in settlement
negotiations with NCC representative Rudeen. Hoich was in close contact with other
TSF representatives, including Ruback and Jandrain, throughout the negotiations.
Hoich spoke to Ruback and Jandrain about what settlement figures Hoich was
authorized to offer NCC, and after Hoich conferenced with Ruback and Jandrain, they
decided Hoich would offer NCC .5 million in exchange for NCCs interests in, and
-17-
claims against, TSE. On the evening of June 20, 2004, Hoich made the offer to
Rudeen. Hoich told Rudeen he would try to raise the money, Hoich was committed
to the deal, and .5 million was as high as Hoich and the other investors could go.
Rudeen testified he did not know who the money would be coming from, and when
asked if Hoich had guaranteed the money would be paid, Rudeen responded, I dont
believe so.
The following morning, June 21, 2004, shortly before the hearing commenced,
Rudeen called Hoich and accepted the deal. After Rudeen accepted the deal, NCC
attorney, Hall, discussed the terms of the agreement with representatives for TSF and
Interstate, and summarized the terms on a note pad. Hoich was not present. Hoich did
not ask anyone to represent him, Hoich did not notify anyone he would be sending an
agent to represent his interests, and no one purported to be present as Hoichs
representative.
Once the terms of the settlement supposedly were established, the confirmation
hearing commenced and Hall read the terms of the agreement on the record. Hall read
the names of the parties involved, and listed Hoich, stating, who--its my
understanding--has personally committed to this deal. After the remainder of the
agreement was read into the record, the bankruptcy court asked a series of questions.
The court first asked Strasheim, Is that your deal? Strasheim responded, [T]hat is
the deal, and explained his understanding the agreement would be put in writing with
a few minor additions, such as representations and warranties. Strasheim then
declared, But I would finally say I do not represent Mr. Hoych [sic]. Strasheim
continued, I believe that [Hoich] is in this deal but Im appearing here on behalf of
Interestate [sic] Financial.
In response Hall stated, I know that Mr. Strasheim does not represent John
Hoych [sic], but it is again our understanding that Mr. Hoych [sic] personally
committed to this deal to the principals of North Central. The court began to ask Hall
4NCC has never alleged or argued Jandrain was Hoichs actual agent. NCC did
eventually argue Jandrain was Hoichs ostensible agent, but NCC failed to raise this
apparent authority claim in its complaint. The complaint alleged Hoich was a party
to the oral agreement made on June 21, 2004, because of Strasheims actions that day
as agent for Hoich. This allegation actually tends to disprove the current contention
NCC was led to believe Jandrain was Hoichs agent at the hearing.
-18-
what this belief was based upon, when Hall interrupted stating, Mr. Jandrain is here
to confirm that. Mr. Hoych [sic] for some reason . . . hes not here. But we think we
have a deal with John Hoych [sic] as well. With that, Strasheim pointed Jandrain out
to the court, and again stated, I think its my understanding that Mr. Hoych [sic] has
committed to this. I simply do not represent him and I would want to make that
clear.
Jandrain was never asked to confirm any representation of Hoich or whether
Hoich had agreed to be bound personally under the settlement agreement. Jandrain
did not object to the statements made by Strasheim and Hall, and Jandrain later
explained his reasons for not objecting were (1) the result of his position in the back
of the crowded court room, (2) he did not want to interrupt proceedings, and (3) he
was never addressed by the court, or anyone else, to inquire whether he was in fact
present to represent Hoichs interests in the matter.
Based upon these facts, we conclude NCC has not met its burden to show
Jandrain was at the June 21, 2004 confirmation hearing with actual authority to bind
Hoich to the settlement agreement.4 South Dakota law dictates, Actual authority is
such as a principal intentionally confers upon the agent, or intentionally or by want
of ordinary care, allows the agent to believe himself to possess. S.D. Codified Laws
59-3-2. The record does not demonstrate Hoich gave Jandrain authority to act on
Hoichs behalf, nor is there any evidence Jandrain believed he had such authority.
-19-
The district court held Jandrain had ostensible or apparent authority to bind
Hoich to the settlement agreement, and Jandrain did so when Jandrain failed to object
to the settlement terms when the terms were read into the record. Under South Dakota
law, the conduct of an agent is insufficient to create an ostensible agency. See
Kasselder, 316 N.W.2d at 630. Neither Jandrains silence in the courtroom, nor the
statements made by Hall and Strasheim at the hearing, were sufficient to create an
ostensible agency.
There is no evidence in the record Hoich intentionally or negligently engaged
in conduct which reasonably led NCC representatives to believe Jandrain was Hoichs
ostensible agent. Rudeen admitted Hoich never told Rudeen, either during the
negotiation process or on the day of the hearing, that Jandrain would be representing
Hoich. At trial when Hoichs counsel inquired of Rudeen, I asked you [at your
deposition], well, did you understand Jim Jandrain was representing John Hoich at
that hearing? And your answer was, I dont know if I could say that, I understood
that or if it was ever specifically stated to me. Was that your testimony? Rudeen
answered, Yes.
Even if NCC believed Jandrain was Hoichs agent, NCC did not ascertain
whether Jandrain had authority to bind Hoich to a .5 million settlement agreement.
NCC did not show the required reasonable diligence and prudence in ascertaining the
fact of the agency and the nature and extent of the agents authority. Dahl, 429
N.W.2d at 462 (citation omitted). The established facts demonstrate: (1) Hoich did
not tell NCC that Hoich intended to be personally liable under the agreement,
(2) Hoich did not inform NCC that Jandrain was authorized to represent Hoichs
interests at the confirmation hearing, (3) Hoich was not present when the terms of the
agreement were drafted, (4) Hoich did not have counsel at the hearing when the other
parties to the agreement had counsel present, and (5) neither Hoich nor Jandrain made
any statements indicating Jandrain was at the hearing on Hoichs behalf. For these
reasons, any belief NCC and its representatives possessed that Jandrain was Hoichs
5Hoich also argues NCCs belief was unreasonable because NCCs counsel
knew, or should have known, that an agent could not make Hoich a party to the oral
agreement without a written document signed by Hoich. Hoich cites a significant
amount of South Dakota law mandating certain types of agency agreements be in
writing. We need not address this issue because the evidence does not support a
finding of ostensible agency.
-20-
agent was unreasonable.5 The district court clearly erred in finding Jandrain was
Hoichs ostensible agent and in holding Hoich personally liable for the settlement
agreement.
D. Judicial Notice
Hoich finally argues the district court erred in taking judicial notice of TSF
business records and a book written by Hoich. During trial, the district court ordered
TSF representatives to provide the court with a copy of TSFs corporate records.
TSF sent its records, which included minutes from an April 23, 2005 TSF meeting.
The minutes noted Jandrain was present at the meeting and had a proxy for twelve
different TSF members, including Hoich. The district court referenced this record in
its opinion, stating, We also know that, based on the business records of TSF,
Jandrain was the holder of a proxy given by Hoich as to the interests of Hoich in TSF.
In other words, the proxy specifically authorized Jandrain to act as an agent for Hoich
as to TSF affairs. American Prairie, 529 F. Supp. 2d at 1069.
After trial, the district court conducted independent internet research, located
Hoichs book, From the Ground Up, and referenced it for the first time in the district
courts opinion. The court took judicial notice of the book and described some of the
contents, including a picture of Jandrain in Hoichs airplane, and its corresponding
caption which read, Jim Jandrain, Johns CPA and friend on Johns plane in 2005,
returning from an ethanol meeting. Id. at 1068. The court referenced another picture
with the caption, Jim Jandrain (Johns CPA), John L. Hoich, and Doug Pugh (Real
Estate Advisor) in front of Johns plane (2006). Id. Based on Hoichs book, the
-21-
court found, John Hoich is not a babe in the woods. He is a very intelligent and
enormously successful business person. . . . He is a friend of more than one President
of the United States. He is a friend of Warren Buffet of Omaha, perhaps the most
sophisticated business person in the world. Id. at 1078-79. The court used this
information to support its finding that Jandrain was Hoichs agent.
We review a district courts decision to take judicial notice for abuse of
discretion. See Baker v. Barnhart, 457 F.3d 882, 891 (8th Cir. 2006). Pursuant to
Federal Rule of Evidence 201(b), A judicially noticed fact must be one not subject
to reasonable dispute in that it is either (1) generally known within the territorial
jurisdiction of the trial court or (2) capable of accurate and ready determination by
resort to sources whose accuracy cannot reasonably be questioned. A court may take
judicial notice at any stage of the proceeding whether or not the notice is requested by
the parties. See Fed. R. Evid. 201(c), (f). Because the effect of judicial notice is to
deprive a party of the opportunity to use rebuttal evidence, cross-examination, and
argument to attack contrary evidence, caution must be used in determining that a fact
is beyond controversy under Rule 201(b). Intl Star Class Yacht Racing Assn v.
Tommy Hilfiger U.S.A., Inc., 146 F.3d 66, 70 (2d Cir. 1998) (citations omitted); see
also Holloway v. Lockhart, 813 F.2d 874, 879 (8th Cir. 1987) (citing Fed. R. Evid.
201(b) advisory committee notes).
The court used the minutes of a TSF meeting to support its conclusion that
Hoich gave Jandrain a proxy which authorized Jandrain to act as an agent for Hoich
as to TSF affairs. American Prairie, 529 F. Supp. 2d at 1069. The document does
not directly state or even imply this. The only conclusion which can be ascertained
from the document is Hoich, and eleven other TSF members, gave Jandrain a proxy
to vote on their behalf in a single meeting taking place ten months after the alleged
agreement was made. The district court also erred in taking judicial notice of
statements Hoich made in his book regarding Hoichs success and the friendships
Hoich had with Jandrain. These facts are not subject to judicial notice under Fed. R.
-22-
Evid. 201(b) or for relevance under Fed. R. Evid. 401 because a friendship and a
position as ones CPA do not tend to establish an authorized agency to negotiate a
contract.
When taking judicial notice of adjudicative facts, the judge is required to use
the procedures set forth in Fed. R. Evid. 201. One of the requirements of Rule 201
is procedural, namely, that the parties be given notice and an opportunity to object to
the taking of judicial notice. United States v. Hoyts Cinemas Corp., 380 F.3d 558,
570 (1st Cir. 2004); see also Fed. R. Evid. 201(e) (A party is entitled upon timely
request to an opportunity to be heard as to the propriety of taking judicial notice and
the tenor of the matter noticed. In the absence of prior notification, the request may
be made after judicial notice has been taken.). While Hoich was present during trial
and he knew the court requested TSF business records, Hoich did not have knowledge
of the specific TSF documents which would be sent, nor did he know which
documents the court would select for taking judicial notice. Thus, Hoich was not
provided with advance notice that the court intended to take judicial notice of minutes
from a TSF meeting. Hoich was also not provided with notice of the courts intent to
take judicial notice of Hoichs book.
Caution must also be taken to avoid admitting evidence, through the use of
judicial notice, in contravention of the relevancy, foundation, and hearsay rules. See,
e.g., Baker, 457 F.3d at 890-92. Each judicially noticed document included hearsay
evidence which is generally only admissible at trial through an enumerated hearsay
exception. No such foundation was laid for the TSF business records before the
district court took judicial notice of the documents. See, e.g., United States v.
Samaniego, 187 F.3d 1222, 1224 (10th Cir. 1999). Further, a proper foundation was
not laid for the admission of statements in Hoichs book. See, e.g., Baker, 457 F.3d
at 891 (quoting Schneider v. Revici, 817 F.2d 987, 991 (2d Cir. 1987)).
-23-
The district court discovered the book when conducting its own independent
research. While courts are often required to conduct independent research regarding
questions of law, [o]n fact questions, the court should not use the doctrine of judicial
notice to go outside the record unless the facts are matters of common knowledge or
are capable of certain verification. Alvary v. United States, 302 F.2d 790, 794 (2d
Cir. 1962) (citations omitted) (deciding [i]t was error for the trial judge to take
judicial notice of text books that were not part of the record).
While district courts have broad discretion to take judicial notice of
administrative facts, under the limited circumstances of this case, the district court
abused its discretion when the court used the judicially noticed evidence to support
a finding Jandrain was Hoichs agent and had authority to bind Hoich to a .5 million
settlement agreement.
III. CONCLUSION
We affirm the district courts denial of Hoichs motion for recusal and
disqualification. We reverse the district courts judgment that Hoich was a guarantor
of, or a party to, the alleged June 21, 2004 settlement agreement, and we hold the
district court abused its discretion when it took judicial notice of the April 23, 2005
TSF meeting minutes and portions of Hoichs book. We reserve all other issues
pending the bankruptcy stay.
______________________________
 

 
 
 

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