K2M Design, Inc. v. Schmidt Consulting Group, Inc.

Background

K2M Design, Inc. sued Peter K. Schmidt, Gene Lim, and Filmwest Global Partnership, LLC over a $1 million promissory note. The note required repayment of $1.2 million, including 20 percent interest, by December 31, 2021. It also imposed a five percent late fee and stated that Lim and Filmwest provided a secondary guarantee if both the borrower and Schmidt defaulted. The note was governed by New York law.

The note was not paid. K2M demanded payment from Lim, and the Lim Defendants later promised repayment by March 31, 2022, but no payment was made. K2M voluntarily dismissed Schmidt Consulting Group, Inc. from the case after informing the court that the entity had been incorrectly sued. The court had already entered default judgment against Schmidt.

Motion to Dismiss

Lim and Filmwest moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim, and Rule 12(b)(7), which concerns failure to join a required party. They argued that K2M had to pursue the borrower and Schmidt before seeking payment from them, and that Schmidt Consulting Group, Inc. was an indispensable party.

The court rejected the condition-precedent argument. It interpreted the note as a guarantee of payment rather than a guarantee of collection. A guarantee of payment allowed K2M to proceed directly against Lim and Filmwest after the borrower and Schmidt defaulted; it did not require K2M to first pursue legal remedies against them. The court also found that K2M adequately alleged the debt, the guarantees, and the failure to pay.

The court further held that Schmidt Consulting Group, Inc. was not an indispensable party. Schmidt had signed the note on behalf of the purported entity and was personally liable as the first guarantor. The court concluded that the judgment against Schmidt allowed Lim and Filmwest to pursue any available rights of subrogation, indemnity, or contribution. The Lim Defendants’ motion to dismiss was therefore DENIED in its entirety.

Partial Summary Judgment

K2M moved for partial summary judgment on its breach-of-contract claim against Lim and Filmwest. Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law.

The court found no genuine factual dispute on the elements of the claim. The note was a valid and enforceable contract; K2M performed by delivering the $1 million loan; the borrower and Schmidt defaulted; Lim and Filmwest did not pay under their guarantee; and K2M was not paid under the note. The court also found that the guarantee language was clear and unambiguous and that the guarantee obligation arose upon the borrower’s and Schmidt’s defaults.

The court rejected arguments that the note was ambiguous, that the absence of the borrower prevented judgment, that K2M’s investigation before making the loan caused its loss, or that Schmidt’s later settlement discussions created a factual dispute. The settlement agreement between K2M and Schmidt did not release the claims against Lim and Filmwest because the required signed and notarized deed was not completed as specified. The court GRANTED K2M’s motion for partial summary judgment on its breach-of-contract claim against the Lim Defendants.

Unjust Enrichment and Final Disposition

K2M also asserted unjust enrichment against Lim and Filmwest but did not seek summary judgment on that claim. Because the court found that an enforceable written contract governed the same subject matter, it held that the unjust-enrichment claim was duplicative of the breach-of-contract claim. The court DISMISSED that claim.

The court DENIED the Lim Defendants’ motion to dismiss, GRANTED K2M’s motion for partial summary judgment, and DENIED K2M’s request for oral argument as moot. The court also DISMISSED K2M’s unjust-enrichment claim against the Lim Defendants. The sole claim remaining for trial was K2M’s fraud claim against Lim personally.