Foy v. Klapmeier
| Citation | 992 F.2d 774 |
| Decision Date | 03 May 1993 |
| Docket Number | 92-1344 and 92-1811,Nos. 92-1244,s. 92-1244 |
| Parties | John T. FOY, Individually and derivatively as a shareholder of JEK Industries, Inc., Plaintiff-Appellee, v. James KLAPMEIER, a resident of Minnesota; Boatel Industries; JEK Industries, a Minnesota corporation; Klapmeier Management, a Minnesota corporation, Defendants-Appellants. Boatel Catamaran, a Minnesota corporation, Defendant. JEK INDUSTRIES, Plaintiff-Appellant, v. John Thomas FOY, Defendant-Appellee. John T. FOY, Individually and derivatively as a shareholder of JEK Industries, Inc., Plaintiff-Appellant, v. James KLAPMEIER, a resident of Minnesota; Boatel Industries; JEK Industries, a Minnesota corporation; Klapmeier Management, a Minnesota corporation; Boatel Catamaran, a Minnesota corporation, Defendants-Appellees. John Thomas Foy, Plaintiff-Appellant, JEK Industries, Defendant-Appellee. John T. FOY, Individually and derivatively as a shareholder of JEK Industries, Inc., Plaintiff-Appellee, v. James KLAPMEIER, a resident of Minnesota; Boatel Industries; JEK Industries, a Minnesota corporation; Klapmeier Management, a Minnesota corporation, Defendants-Appellants. Boatel Catamaran, a Minnesota corporation, Defendant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Eric J. Magnuson (argued), Richard J. Nygaard and Stephen K. Warch, Minneapolis, MN, appeared on the brief, for appellant.
Richard T. Ostlund, Minneapolis, MN, argued, for appellee.
Before McMILLIAN, Circuit Judge, FRIEDMAN, * Senior Circuit Judge, and MORRIS SHEPPARD ARNOLD, Circuit Judge.
Appellants James E. Klapmeier, JEK Industries, Inc. (JEK), Boatel Industries, Inc. (Boatel), and Klapmeier Management Co. appeal from a final judgment of the United States District Court for the District of Minnesota 1 awarding appellee John T. Foy $240,000.00 as the fair value of his five percent shareholder interest in JEK and costs, attorney's fees of $146,328.61, and prejudgment interest in the amount of $77,914.60. For reversal, appellants argue the district court erred in (1) failing to apply equitable doctrines to bar Foy's equitable relief, (2) ordering business appraisers, for purposes of determining the value of JEK, to assume Boatel was a division of JEK without considering the cost JEK would have paid to acquire the corporate opportunity, (3) instructing the jury to assume that JEK owned the Inland Cruiser line in determining if Foy's conduct financially harmed JEK, (4) holding Klapmeier personally liable for the value of Foy's shares, and (5) awarding Foy costs and attorney's fees. On cross-appeal Foy argues the district court erred in applying a minority discount in evaluating Foy's shares and in not allowing Foy to participate in a stock dividend paid by JEK in 1987. We modify the judgment of the district court and affirm the judgment as modified. We remand the case to the district court for the limited purpose of calculating additional prejudgment interest.
JEK is a closely held Minnesota corporation as defined by Minn.Stat. § 302A.011, and is engaged in the business of manufacturing recreational watercraft. Foy, a citizen of Colorado, was an officer and director of JEK, as well as the registered owner of five percent of JEK stock. Klapmeier, a citizen of Minnesota, was the president and 95% shareholder of JEK, an officer and director of Boatel, and owner of Klapmeier Management Co., which was the parent corporation of JEK, Boatel, and Boatel Catamaran, Inc. 2 All of the businesses were incorporated in Minnesota and each has its principal place of business in Mora, Minnesota.
In 1970, Foy was hired as a Boatel sales representative. Klapmeier acquired the Boatel Co. in 1971 after its owner, Telecheck International, filed for bankruptcy. After purchasing the Boatel assets and operations, Klapmeier incorporated JEK and contributed to JEK all of the Boatel assets and operations he had purchased in exchange for 100% of JEK stock and a $306,000 promissory note. After Klapmeier's acquisition of Boatel, Foy continued to work as a sales representative for JEK until 1972 when he purchased five percent of JEK's shares of stock. Foy became Vice President of Sales and Marketing for JEK in 1975 and Director of JEK in 1978.
On December 31, 1976, Klapmeier caused JEK to sell the manufacturing facility, consisting of both the land and buildings, to him personally for $275,000. As part of the transaction Klapmeier contracted to lease the property back to JEK under a long-term lease. Klapmeier executed the sale and lease-back transaction without prior disclosure to or approval by Foy as minority shareholder. Klapmeier informed Foy of the sale and lease-back in the summer of 1977.
From its incorporation in 1972 until approximately 1976, JEK manufactured and sold two types of boats: traditional steel pontoon houseboats and various styles of fiberglass boats. During 1975 and 1976, Klapmeier sued a former employee who had established Foy contended he never knew JEK's pontoon houseboat product line had been transferred to a separate corporation in which he had no interest. Foy claimed that until August 1984, he thought the creation of BCI was a method of carrying out the agreement he believed he reached with Klapmeier in 1976: the pontoon houseboat business would be treated as a separate division of JEK for accounting purposes so that the two product lines could be monitored separately. Foy admitted that he wanted JEK to concentrate on the sale of fiberglass yachts, but stated he had never consented to releasing his ownership interest in JEK's pontoon houseboat business.
a business in direct competition with JEK in violation of an agreement not to compete. The settlement resulted in Klapmeier's acquiring that business which he renamed Boatel Catamaran, Inc. (BCI). Klapmeier was the sole director and president of BCI. After Klapmeier acquired BCI, JEK and BCI entered into a licensing agreement which provided that JEK would manufacture steel pontoon houseboats and BCI would be the exclusive seller of these houseboats. According to Klapmeier, he bought BCI individually because Foy wanted JEK to stay out of the houseboat business and deal exclusively in fiberglass yachts. The net result of this transaction was that JEK transferred its pontoon houseboat product line to BCI, which Klapmeier personally owned and controlled. The district court found this transaction was self-dealing by Klapmeier. Foy v. Klapmeier, No. 3-90 CIV 292, slip op. at 10 (D.Minn. Feb. 21, 1991) (Foy )
The early 1980's were slow years in the recreational boating industry, and Klapmeier began pursuing ways to improve the sales and profitability of his boating business. One of Klapmeier's ideas was to produce and sell a boat initially labeled the "Inland Cruiser." 3 Beginning in early 1982, Klapmeier made the Inland Cruiser project a top priority. He intended to use the skills, materials and know-how available from both JEK and BCI in developing the project. The Inland Cruiser was made using molds from JEK's fiberglass yachts, and JEK employees who built the fiberglass yachts also worked on the Inland Cruiser. Klapmeier decided that the Inland Cruiser product line would be sold through BCI under the same licensing agreement under which pontoon houseboats were being sold. Klapmeier made this decision without seeking Foy's consent or approval.
Klapmeier told Foy about the Inland Cruiser project, and also told him that he (Foy) would have no involvement in the design or sale of the Inland Cruiser which would be manufactured by JEK, but sold by BCI. Accordingly, Foy would enjoy none of the profits associated with the sales of the Inland Cruiser. The Inland Cruiser became available for sale in 1983 and was an immediate success, earning $1.5 million in 1983 and approximately $8 million in 1984. Foy terminated his employment with JEK on May 18, 1983, but continued to hold five percent of JEK stock. Shortly after Foy's departure, Klapmeier decided to transfer the sales of the Inland Cruiser product line back to JEK from BCI.
In August 1984, Foy and Klapmeier met at a restaurant to attempt to resolve the ongoing ownership and financial dispute between them. Foy informed Klapmeier that he was contemplating litigation against Klapmeier and JEK, and he claimed a right to five percent of both JEK and BCI. Two days after the meeting with Foy, Klapmeier abandoned the previously announced sale of the Inland Cruiser line to JEK from BCI. The district court found that Klapmeier had backdated the minutes of the JEK and BCI board of directors meeting to tie the abandonment of this transaction to a date before the August 1984 meeting with Foy. Foy, slip op. at 19. After rescinding the sale of the Inland Cruiser line to JEK, Klapmeier created a new corporation, Boatel, of which Klapmeier was the sole shareholder, for the purpose of purchasing the Inland Cruiser product line. Klapmeier then transferred all of JEK's assets related to the manufacture of the Inland Cruiser, totaling approximately $2,300,000 of JEK's then existing total assets of $2,900,000 On June 22, 1987, Foy filed a shareholder derivative action against Klapmeier, BCI, Boatel, JEK, and Klapmeier Management Co. pursuant to Minn.Stat. § 302A.751 in federal district court, alleging breach of fiduciary duty, breach of the duty of loyalty, usurpation of a corporate opportunity, and violation of Foy's appraisal rights dating from July 31, 1986. Jurisdiction was based on diversity of citizenship. 28 U.S.C. § 1332. In addition to monetary damages, Foy sought determination of the fair value of his five percent interest in JEK under Minn.Stat. § 302A.473. On October 2, 1987, JEK filed its own suit against Foy in state court, alleging breach of fiduciary duty, breach of the duty of loyalty as an officer and director of JEK, intentional interference with contractual relations, and unfair competition. ...
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