Ayres v. Ag Processing Inc.
| Decision Date | 18 November 2004 |
| Docket Number | No. 03-2060-DJW.,03-2060-DJW. |
| Citation | 345 F.Supp.2d 1200 |
| Parties | William AYRES and Douglas Pickering, Plaintiffs, v. AG PROCESSING INC, a Cooperative, George Hoover, Martin Reagan, and John Campbell, Defendants. |
| Court | U.S. District Court — District of Kansas |
Rick D. Holtsclaw, Holtsclaw & Kendall, L.C., Kansas City, MO, Roger M. Phillips, Leawood, KS, for plaintiffs.
This matter is before the Court on the Motion to Dismiss (doc. 4) filed by Defendants AG Processing, Inc., George Hoover, Martin Reagan, and John Campbell. Pursuant to Fed.R.Civ.P. 12(b)(6), Defendants move to dismiss the following causes of action to the extent they allege derivative claims: breach of fiduciary duty (Count I), minority oppression (Count III), and breach of contract (Count IV). Defendants also move to dismiss Plaintiffs' tortious interference with prospective business advantage or relationship (Count II), breach of contract (Count IV), and failure to fund 401 profit sharing plan (Count V) claims in their entirety. The parties have consented to the exercise of jurisdiction by a United States Magistrate Judge pursuant to 28 U.S.C. § 636(c). For the reasons set forth below, Defendants' Motion to Dismiss is granted in part and denied in part.
Plaintiffs are minority members and former managers of a Nebraska limited liability company ("LLC"). They bring this action against the majority LLC member, Defendant corporation AG Processing, Inc., and three managers of the LLC, Defendants Reagan, Hoover, and Campbell ("Individual Defendants"). The Individual Defendants are also corporate officers of majority LLC member, Defendant AG Processing, Inc. Martin Reagan is the Chief Executive Officer, George Hoover is the Group Vice-President, and John Campbell is the Vice-President of Government Relations and Industrial Products.
On February 15, 1995, Plaintiffs, citizens of Kansas, entered into an Operating Agreement with Defendant AG Processing, Inc., a Nebraska corporation, to form a Nebraska limited liability company, AG Environmental Products, L.L.C. ("AEP LLC"). At the time AEP LLC was formed, Defendant AG Processing, Inc. owned ninety-nine percent, Plaintiff Ayres owned one-half percent, and Plaintiff Pickering owned one-half percent.
AEP LLC was formed to market methyl esters, supplied by Defendant AG Processing, Inc., as biodiesel, agrochemicals, solvents, release agents, and related industrial products. AEP LLC's principal place of business is located in Omaha, Nebraska, but it maintains offices in Johnson County, Kansas, where Plaintiffs carried out their duties as members, managers, and employees of AEP LLC.
The Operating Agreement executed by Plaintiffs and AG Processing, Inc. provides that AEP LLC will be managed by certain designated managers. Managers must either be members of AEP LLC or a member's employee. The five initial managers of AEP LLC were Plaintiffs Ayres and Pickering, Defendant John Campbell, Richard Lee, and Joseph Meyer. Of the five initial managers, Plaintiffs were nominated by themselves, with the three other initial managers nominated by the majority LLC member, Defendant AG Processing, Inc.
The Operating Agreement provides that the business and affairs of AEP LLC shall be managed by its designated managers and the managers "shall in all cases act as a group, with a majority vote or consent of the managers required to take action."1 Each manager is entitled to hold office until he or she is removed by the member who nominated him or her, or until a successor is elected and qualified.
In their positions as managers of AEP LLC, Plaintiffs were paid a salary in addition to fringe benefits. In addition, the Operating Agreement provides that each Plaintiff, as a "minority owner," could qualify for cash and unit performance bonuses. The cash bonus was contingent upon AEP LLC generating positive net earnings at the end of any fiscal year. Each Plaintiff was eligible for an equity bonus when his individual equity ownership percentage reached five percent. The equity bonus was to be equal to the cash performance bonus for any fiscal year, except that it could not exceed five percent of the total equity of AEP LLC.
The Operating Agreement executed by Plaintiffs and Defendant AG Processing, Inc. also set forth several other accounting-related provisions at issue in this case. Those provisions require that AEP LLC's net profits and losses be established through the use of generally accepted accounting principles and allocated to members in proportion to the balances in their respective capital accounts at the end of each fiscal year. The Operating Agreement also requires AEP LLC to deliver to each member, within ninety days after the expiration of each AEP LLC fiscal year, a statement of receipts and expenses prepared by the accountants chosen by the managers, together with a statement reflecting the net profits or losses of AEP LLC for such fiscal year. Finally, the Operating Agreement requires that annual member meetings be held.
At some point, Plaintiffs became concerned about certain actions taken by Defendants, including, inter alia, investing in unsecured business investments, using AEP LLC funds for political lobbying, manipulating funds from USDA Commodity Credit Corporation between fiscal accounting years to decrease AEP LLC's profits for 2003, failing to hold annual meetings, failing to provide year-end financial disclosures timely, and failing to distribute equity bonuses to Plaintiffs. Plaintiffs allege that they protested these actions and demanded that the Operating Agreement requirements be followed and that the unrelated business activities cease. Defendants' response to Plaintiffs' demand was to terminate Plaintiffs as managers, employees, and members of AEP LLC on October 28, 2003.
On February 17, 2004, Plaintiffs filed the current diversity action alleging damages for breach of fiduciary duty, tortious interference with prospective business advantage or relationship, minority oppression, breach of contract, and failure to fund 401 profit sharing plan. Defendants responded by moving to dismiss Plaintiffs' claims either to the extent that they allege derivative claims or in their entirety.
A Rule 12(b)(6) motion to dismiss will be granted only if it appears beyond a doubt that the plaintiff is unable to prove any set of facts entitling him to relief under his theory of recovery,2 or when an issue of law is dispositive.3 Dismissal is a harsh remedy to be used cautiously so as to promote the liberal rules of pleading while protecting the interests of justice.4
In ruling on a motion to dismiss, the court accepts as true all well-pleaded facts as distinguished from conclusory allegations,5 and all reasonable inferences from those facts must be viewed in favor of the non-moving party.6 Although not required to precisely state each and every element of his claim, a plaintiff must at least advance minimal factual allegations on the material elements of his claim to survive a Rule 12(b)(6) motion to dismiss.7 The ultimate issue in reviewing the sufficiency of a complaint is not whether the plaintiff will prevail, but whether the plaintiff is entitled to offer evidence to support his claims.8 Notwithstanding these deferential rules, the court is not allowed to assume that a plaintiff "can prove facts that it has not alleged or that the defendants have violated the ... laws in ways that have not been alleged."9
In Counts I and III of their Complaint, Plaintiffs claim that Defendants (1) breached the fiduciary duty they owe to Plaintiffs, and (2) Defendant AG Processing, Inc., as majority member of AEP LLC, oppressed Plaintiffs as minority members by wrongfully terminating Plaintiffs as managers, employees, and members of AEP LLC, despite the financial and operational advantages they provided to AEP LLC. Plaintiffs also allege that Defendants engaged in conduct that adversely affected AEP LLC's profits and assets for the benefit of the profits and assets of Defendant AG Processing Inc. More specifically, Plaintiffs assert Defendants caused AEP LLC to invest in risky, unsecured business investments, used AEP LLC funds for political lobbying, and manipulated funds from USDA Commodity Credit Corporation between fiscal accounting years so as to decrease AEP LLC's profits for 2003. Finally, Plaintiffs claim that Defendants breached their fiduciary duty by failing to hold annual meetings, failing to use generally accepted accounting principles, failing to provide the required financial disclosures to Plaintiffs within ninety days of the close of fiscal year 2003, and failing to distribute equity bonuses to Plaintiffs, all required by AEP LLC's Operating Agreement.
Before addressing the substantive issues, the Court must first determine what law governs Plaintiffs' breach of fiduciary duty and minority oppression claims. The parties disagree as to whether Nebraska or Kansas law governs these claims. They also disagree on which state's law governs whether Plaintiffs may assert their breach of fiduciary duty and minority oppression claims derivatively or whether they may assert these claims directly, which impacts whether Plaintiffs must comply with the Fed.R.Civ.P. 23.1 procedural requirements for derivative actions.
A federal court exercising diversity jurisdiction applies the choice of law rules from the state in which the court sits.10 Thus, the Court must look to Kansas law to determine which state's laws apply to Plaintiffs' breach of fiduciary duty and minority oppression claims.
Kansas has a statutory choice of law provision governing foreign limited liability companies, which is set forth in the Kansas Revised...
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