Steffen v. Northway Resource Development, LLC

Patrick J. Schiltz, United States District Judge

[Plaintiff Steffen left an ophthalmology practice affiliated with Defendant Northway.  As part of the (acrimonious) parting, defendant “properly exercised its right to buy back Steffen’s membership interest.” The primary dispute at trial was the valuation date for Steffen’s interest.  Steffen gave notice of his resignation in April 2018, and ended his employment on August 5, 2018.  “Northway exercised its repurchase option on September 4, 2018."

Steffen argues that that valuation should be as of his termination date, August 5, 2018.  Northway argues that the valuation should be as of December 31, 2018.  The contract did not specify a valuation date.  The valuation date, however, matters greatly because Steffen claims Northway made a poor real estate deal in the intervening period, resulting in a loss in company value.]

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. . . Northway argues that the extrinsic evidence proves beyond reasonable dispute that the valuation date is December 31, 2018. ECF No. 30 at 14–16. The specific extrinsic evidence to which Northway points is (1) “historical practice,” id. at 14, and (2) communications made in the course of negotiations between Steffen and Northway, id. at 14–15.

a. Historical Practice

As to historical practice: Northway cites the testimony of the chief financial officer of the four companies making up the practice that “every member of Northway, including [Steffen], bought into the Practice using share prices determined as of December 31 of the previous year.” ECF No. 34 ¶ 1–2. But it is not apparent why this buy-in practice is relevant to determining the valuation date for Northway's buy-out of a member's interest.

Northway also cites evidence that, while Steffen was a member of Northway, four doctors left the practice (with varying degrees of acrimony). Id. ¶¶ 3–6. Their shares were all valued as of December 31 of the year before their termination (excepting one retiring member, who agreed to split his buyout into two parts). Id. But, as Northway admitted at oral argument, none of these doctors contested their valuation dates (not even the departing doctor who was “litigious”). In other words, there is no evidence that the parties gave any thought to the issue. That weakens the probative value of this evidence.

At best, historical practice provides only modest support for Northway's position.

b. Parties’ Negotiations

Northway also relies on statements made (or not made) by Steffen's attorneys during negotiations with Northway's attorneys. Steffen's previous counsel sent Northway's counsel two letters in June 2018. The first, dated June 14, asserted that, “under the various Redemption Agreements, Dr. Steffen's buy-out should be calculated based on a termination date after June 30, 2018 and thus should use December 31, 2018, valuation numbers and not December 31, 2017, valuation numbers ....” ECF No. 36-1 at 97. That letter goes on to suggest that Steffen may be amenable to a December 31, 2017, valuation date if that would result in a higher price than would a December 31, 2018, valuation date; the letter asks Northway's counsel to send calculations using both the actual December 31, 2017, numbers and the projected December 31, 2018, numbers. See id. The second letter, dated June 18, responds to calculations that Northway's counsel had supplied after receiving the June 14 letter. Id. at 99.

Northway also relies upon two letters that it sent to Steffen in early 2019. ECF No. 30 at 14–15. One letter, dated January 4, 2019, proposes (among other things) to value the Woodlake building the same as its value on December 31, 2017, and to send Steffen his share of the distribution from the sale of the Beam building. ECF No. 37 at 5–6. The other letter, dated January 8, 2019, is a reply to Steffen's response to the January 4 letter. Id. at 8–9. Northway points out that Steffen did not disagree with the December 31, 2017, valuation date that it proposed.

Like the historical-practice evidence, these letters provide only limited support for establishing a December 31, 2018, valuation date under the MCA. The June 2018 letters explicitly discuss the valuation dates under the Redemption Agreements, not the MCA. ECF No. 36-1 at 97. It is thus not clear whether those letters even refer to the Northway valuation date. And the January 2019 letters have little (if any) probative value; there is simply not much to connect those letters with Northway's proposed date of December 31, 2018. In fact, the only valuation date mentioned in either of the January letters is the date of December 31, 2017—and that is for the Woodlake building, not the Beam building.

The letters have another problem. On summary judgment, the Court may consider only admissible evidence. Fed. R. Civ. P. 56(c); Lipp v. Cargill Meat Sols. Corp., 911 F.3d 537, 544 n.6 (8th Cir. 2018). The statements in these letters are not admissible. Evidence of “a statement made during compromise negotiations about [a disputed] claim” is “not admissible—on behalf of any party—either to prove or disprove the validity or amount of [that] disputed claim or to impeach by a prior inconsistent statement or a contradiction.” Fed. R. Evid. 408(a), (a)(2).

Rule 408 applies only to “compromise evidence relating to a ‘claim’ that was disputed when the settlement negotiations ... took place.” Weems v. Tyson Foods, Inc., 665 F.3d 958, 965 (8th Cir. 2011). But “a dispute need not ‘crystallize to the point of threatened litigation’ for the 408 exclusion rule to apply.” Id. (quoting Affiliated Mfrs., Inc. v. Aluminum Co. of Am., 56 F.3d 521, 527 (3d Cir. 1995)). Rather, a dispute exists if “there is ‘an actual dispute or difference of opinion’ regarding a party's liability for or the amount of the claim.” Id. (quoting Affiliated Mfrs., 56 F.3d at 527). For example, in Weems (an employment-discrimination case), the Eighth Circuit found that the trial court had committed reversible error in admitting into evidence a proposed separation agreement that the defendant employer had sent to the plaintiff employee after she was removed from her position and after she expressed concerns about her removal to a human-resources officer. Id. at 963, 965–66. The Eighth Circuit held that Rule 408 barred admission of the proposed agreement even though the employee had not threatened or even “contemplat[ed] legal action at the time.” Id. at 965.

Here, when the letters between Steffen's counsel and Northway's counsel were sent, there was a clear disagreement between the parties about how much Steffen's interest in the overall practice was worth. The letters themselves provide evidence of that disagreement. See ECF No. 36-1 at 97, 99; ECF No. 37 at 6, 9. Thus, there was a claim in dispute for purposes of Rule 408. And all of the letters were sent in the course of negotiations regarding that disputed claim.10

Northway contends that Rule 408 does not bar the June 14, 2018, letter because the letter “does not offer to compromise on the disputes in this litigation.” ECF No. 48 at 5 n.2. Northway says that the letter predates Steffen's litigation in state court and was sent nearly two years before Steffen first told Northway that he disputed the valuation date for the Northway buyout. Id.

But a court applying Rule 408 does not slice litigation so finely. Rule 408 is intended to promote “the public policy favoring the compromise and settlement of disputes.” Weems, 665 F.3d at 965 (quoting Fed. R. Evid. 408 advisory committee's note (1972)). And a court must apply Rule 408 “in light of its underlying purpose.” Id. Settlement negotiations would be chilled if courts broke those negotiations into fragments and insisted that each fragment directly relate to an actually disputed issue in order for Rule 408 to apply. Parties would be discouraged from taking any position on any issue—even issues that they do not (yet) consider to be in dispute—lest they be stuck with those positions in later litigation. See id. at 967 (“It would be unreasonable to expect a party to ever make a settlement offer if doing so forced it into choosing between conceding one or more elements of liability or damages or having the offer admitted against it.” (quoting Stockman v. Oakcrest Dental Ctr., P.C., 480 F.3d 791, 798–99 (6th Cir. 2007))); see also 2 McCormick on Evidence § 266 (Robert P. Mosteller et al. eds., 8th ed. 2020).

To summarize: The admissible extrinsic evidence of historical practice provides modest support for the contention that the MCA's valuation date is December 31 of some year (not necessarily 2018). But that evidence does not compel a finding that the valuation date is December 31, 2018. A reasonable factfinder could also conclude that there was simply no agreement between the parties regarding the valuation date. This issue will have to be tried.