Brandt v. Somerville, 20040112

• Decision Date: 16 February 2005
• Docket Number: No. 20040112,20040112
• Citation: 2005 ND 35,692 NW 2d 144
• Parties: David W. Brandt, John A. Brandt, and Roy Brandt, Plaintiffs, Appellants and Cross-Appellees v. Dean S. Somerville, Margaret D. Somerville, and Posilock Puller, Inc., Defendants, Appellees and Cross-Appellants
• Court: North Dakota Supreme Court

2005 ND 35

692 NW 2d 144

David W. Brandt, John A. Brandt, and Roy Brandt, Plaintiffs, Appellants and Cross-Appellees v. Dean S. Somerville, Margaret D. Somerville, and Posilock Puller, Inc., Defendants, Appellees and Cross-Appellants

No. 20040112

Supreme Court of North Dakota.

Filed February 16, 2005

Roger J. Minch, Serkland Law Firm, P.O. Box 6017, Fargo, N.D. 58108-6017, for plaintiffs, appellants and cross-appellees.

Robert G. Hoy (argued) and Sean M. Fredricks (on brief), Ohnstad Twichell, P.C., P.O. Box 458, West Fargo, N.D. 58078-0458, for defendants, appellees and cross-appellants.

Opinion of the Court by Kapsner, Justice.

Kapsner, Justice.

[¶1] David Brandt, John Brandt, and Roy Brandt appealed and Dean Somerville, Margaret Somerville, and Posilock Puller, Inc., cross-appealed from a judgment and post-judgment order in Brandts' shareholder action against Somervilles seeking damages for breaches of fiduciary duties and seeking an order requiring Somervilles to buy Brandts' shares of Posilock for fair market value. We hold the trial court's findings of fact about the Brandts' claims for breaches of fiduciary duties are not clearly erroneous, the court did not err in applying the book value provision of a stock transfer agreement to Somervilles' buyout of Brandts' shares of Posilock, and the court did not abuse its discretion in determining a remedy for Somervilles' misappropriation of Posilock's corporate opportunity. We affirm.

I

[¶2] In 1978, David Brandt and Dean Somerville incorporated Posilock as a closely-held corporation to manufacture and market a bearing puller developed and patented by Dean Somerville and David Brandt's deceased father, Paul Brandt. Contemporaneously with Posilock's incorporation, David Brandt and Dean Somerville executed a written stock transfer agreement that restricted the transfer of any Posilock stock by providing the other shareholders with an option to purchase the stock for book value. Posilock's stock certificates included language subjecting the certificates to the stock transfer agreement and stating the certificates were transferrable only in accordance with that agreement. David Brandt and Dean Somerville each received half of the Posilock stock, and David Brandt ultimately divided his Posilock stock with his brothers, John, Herman, and Roy Brandt.

[¶3] The Somerville and the Brandt families initially did most of the work to manufacture and sell the bearing pullers, and Posilock operated out of a building in McHenry, North Dakota. After a 1984 fire destroyed that building, Somervilles purchased property in Cooperstown, which they leased to Posilock to continue operations. Although the Brandts collectively retained half of Posilock's stock and David Brandt served as a director and secretary for Posilock, Brandts' involvement with the day-to-day operations of Posilock gradually diminished after the 1984 fire and move to Cooperstown. During the same period, Dean Somerville served as a director and president of Posilock, and he became more involved in running Posilock. Dean Somerville eventually started other family-owned businesses, including DMI and Dynamics 360, which share office space with Posilock in the Cooperstown facility. The Brandts do not have any ownership interest in DMI or Dynamics 360. DMI is a teleservices firm that was incorporated in 1992. Dynamics 360 was incorporated in 1992 and provides Posilock with some marketing and human resource services. Dynamics 360 consists of three divisions, a gift basket division, a sales division, and PL MFG.

[¶4] In 1998, Posilock's supplier of component parts for the bearing puller announced a large price increase for those parts, and Somervilles formed PL MFG as a division of Dynamics 360 to produce the component parts for the bearing puller. PL MFG also makes products for other manufacturers, but about half of its production consists of the parts for Posilock's bearing puller. The startup cost for PL MFG included a $450,000 loan to Posilock from Sheyenne Valley Electric Cooperative under the Rural Electric Development Loan and Grant Program. The loan process required a Cooperstown bank to guarantee the loan, and the bank, in turn, required a personal guarantee by Dean and Margaret Somerville. The necessary loan documents were executed by Posilock, and Posilock endorsed a $450,000 check to Dynamics 360, which then deposited the check into Dynamics 360's account. In 2000, Posilock's accountant discovered the loan had been made to Posilock, not Dynamics 360, and recommended listing the loan as a liability for Posilock and as a receivable from Dynamics 360. PL MFG thereafter executed a formal promissory note to Posilock.

[¶5] In October 2000, Brandts sued Somervilles and Posilock, alleging Somervilles operated Posilock without regard to their duties and obligations to the corporation and to Brandts, and Somervilles breached numerous fiduciary duties to Brandts in violation of N.D.C.C. §§ 10-19.1-50, 10-19.1-51, and 10-19.1-60. Brandts alleged Somervilles failed to provide them with appropriate corporate records and disclosure of information about Posilock and its relationship with Somervilles' other family-owned corporations; paid excessive salaries to family members; used Posilock's resources and good standing to obtain the $450,000 loan for Dynamics 360; stopped making royalty payments to Brandts for a patent on the bearing puller and never paid them dividends for Posilock; took numerous steps to freeze out Brandts and render their shares of Posilock valueless; and misappropriated Posilock's business opportunities. Brandts sought an equitable remedy, including an accounting and a fair value buyout of their shares of Posilock, and other damages for Somervilles' breaches of their fiduciary duties and their duty of good faith. Somervilles denied breaching any fiduciary duties to the Brandts and counterclaimed to buy Brandts' Posilock stock for book value under the terms of the stock transfer agreement.

[¶6] After a bench trial, the court found Somervilles did not act fraudulently or illegally toward Brandts. In language tracking N.D.C.C. § 10-19.1-115(1)(b)(3), the court found Somervilles' involvement with PL MFG was conducted in a manner "unfairly prejudicial" to Brandts and constituted a wrongful appropriation of Posilock's corporate opportunity to produce its own parts. The court determined the stock transfer agreement was binding on the parties, the terms of the agreement were not unreasonable, and Brandts' shares of Posilock stock were subject to a buyout for book value as calculated under a formula in the agreement. The court concluded Posilock's opportunity to manufacture its own parts was an available business opportunity for Posilock, and with the personal guarantee of Dean Somerville, Posilock had the financial ability to manufacture the parts. The court found Dean Somerville did not act in bad faith in expanding Dynamics 360 at the expense of Posilock. However, the court concluded, except as to the gift basket division of Dynamics 360, the activities of Dynamics 360 constituted a wrongful appropriation of Posilock's corporate opportunity, but the activities of DMI were not an appropriation of Posilock's corporate opportunity. In placing a value on Somervilles' wrongful appropriation of Posilock's corporate opportunity, the court applied the formula in the stock transfer agreement to Dynamics 360. The court ultimately ordered Somervilles to pay Brandts $930,344, plus interest, for Brandts' shares of Posilock stock and for the wrongful appropriation of Posilock's corporate opportunity.

II

[¶7] We analyze Brandts' claims within the framework of N.D.C.C. ch. 10-19.1, the North Dakota Business Corporation Act. See Lonesome Dove Petroleum, Inc. v. Nelson, 2000 ND 104, ¶ 29, 611 N.W.2d 154 (applying N.D.C.C. ch. 10-19.1 to claims that majority shareholders and officers breached fiduciary duties to minority shareholder and holding there was no separate common law fiduciary duty). We have recognized that N.D.C.C. ch. 10-19.1 provides significant protection for minority shareholders in a close corporation. Fisher v. Fisher, 546 N.W.2d 354, 358 (N.D. 1996). In Lonesome Dove, at ¶ 30, we said N.D.C.C. ch. 10-19.1 "imposes a duty upon officers, directors, and those in control of a corporation to act in good faith, and affords remedies to minority shareholders if those in control act fraudulently, illegally, or in a manner unfairly prejudicial toward any shareholder." See also Fisher v. Fisher, 1997 ND 176, ¶ 20, 568 N.W.2d 728; Grinaker v. Grinaker, 553 N.W.2d 200, 202-03 (N.D. 1996); Fisher, 546 N.W.2d at 358; Schumacher v. Schumacher, 469 N.W.2d 793, 797 (N.D. 1991); Balvik v. Sylvester, 411 N.W.2d 383, 385-89 (N.D. 1987).

[¶8] Sections 10-19.1-50, 10-19.1-51, and 10-19.1-60, N.D.C.C., generally outline standards of conduct for officers and directors of corporations. Sections 10-19.1-50 and 10-19.1-60, N.D.C.C., require officers and directors of a corporation to discharge their duties in good faith, in a manner reasonably believed to be in the best interest of the corporation, and with the care an ordinary prudent person in a like position would exercise under similar circumstances. Section 10-19.1-51, N.D.C.C., outlines standards for conflicts of interests in transactions between a corporation and its directors or their families. Shareholders have a broad right of access to corporate documents under N.D.C.C. §§ 10-19.1-84 and 10-19.1-85, see Nodak Mut. Ins. Co. v. Ward County Farm Bureau, 2004 ND 60, ¶ 27, 676 N.W.2d 752, and those in control of a corporation may not freeze out minority shareholders, or fail to provide them with adequate information about the corporation. See Grinaker, 553 N.W.2d at 202-03; Balvik, 411 N.W.2d at 385-89.

[¶9] Under N.D.C.C. § 10-19.1-85.1, in an action brought by a shareholder, a court may grant equitable relief it considers just and reasonable under the...