Case v. McColloch, s. 20401

• Decision Date: 19 October 1998
• Docket Number: Nos. 20401,20420,s. 20401
• Citation: 587 N.W.2d 205,1998 SD 117
• Parties: Maxine B. CASE, Plaintiff and Appellant, v. Jean McCOLLOCH and Judith Sides, Defendants and Appellees. Jean McCOLLOCH, Counterclaimant, Crossclaimant and Appellee, and Sandra McCroden, Craig Murdock and Nancy Murdock, Intervening Claimants and Appellees, v. Maxine B. CASE, Defendant and Appellant, and Judith Sides and Gary Case, Defendants. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 205

587 N.W.2d 205

1998 SD 117

Maxine B. CASE, Plaintiff and Appellant, v. Jean McCOLLOCH and Judith Sides, Defendants and Appellees.

Jean McCOLLOCH, Counterclaimant, Crossclaimant and Appellee, and Sandra McCroden, Craig Murdock and Nancy Murdock, Intervening Claimants and Appellees, v. Maxine B. CASE, Defendant and Appellant, and Judith Sides and Gary Case, Defendants.

Nos. 20401, 20420.

Supreme Court of South Dakota.

Considered on Briefs Oct. 19, 1998.

Decided Dec. 9, 1998.

John J. Delaney of Delaney & Sumner, Rapid City, Rebecca A. Porter, Rapid City, for appellant.

Thomas E. Brady, Spearfish, for appellees.

SABERS, Justice.

¶1 This is a consolidated appeal. The parties are shareholders in Hickok's, Inc., a closely-held corporation. Maxine Case filed a complaint alleging Jean McColloch entered into a loan agreement with Judith Sides which was actually a disguised purchase of Sides' shares of stock in Hickok's, Inc. (shares) in violation of the corporation's articles of incorporation. McColloch counterclaimed that Maxine Case, Gary Case, and Sides breached an agreement to sell their shares to McColloch. Sandra McCroden, Craig Murdock and Nancy Murdock intervened as plaintiffs. The trial court found that 1) the stock transaction was a loan, not a disguised sale and 2) the parties had not entered into an agreement to sell their shares. We reverse 1) and affirm 2).

FACTS

¶2 Hickok's, Inc. is a closely-held corporation formed in 1989 to own and operate a casino in Deadwood, South Dakota. Maxine Case owns 1,200 shares with 400 of the shares co-owned with her son, Gary Case. Judith Sides, Gary's ex-wife, owns 400 shares. Jean McColloch and her daughter, Sandra McCroden, co-own 400 shares. Maxine Case and McColloch are sisters. Craig and Nancy Murdock (Murdock) co-own 400 shares and are not related to the other parties.

¶3 The parties have a long history of conflict and litigation. Two previous appeals have been heard by this court, Case v. Murdock, 488 N.W.2d 885 (S.D.1992) and Case v. Murdock, 528 N.W.2d 386 (S.D.1995). Two factions have developed: the Case faction consisting of Maxine Case, Gary Case, and Sides and the McCroden faction consisting of McCroden, McColloch, and Murdock.

¶4 The articles of incorporation of Hickok's, Inc. contain a preemptive rights provision which requires any shareholder wishing to sell his or her shares to first offer the shares to the corporation. In the event the corporation declines to purchase the shares, the current shareholders are given a preference in the purchase of the shares.

¶5 On February 27, 1996, Maxine Case, Gary Case, and Sides met and discussed the sale of one faction's shares to the other as a solution to problems within the corporation. They agreed upon a price of $668.75 a share, with a 30% downpayment and the balance paid over 10 years at 8% interest. The security was left for later determination. Attorney Robert LaFleur was present at the meeting and represented Maxine and Gary Case. It was suggested that Sides retain separate counsel to represent her in the potential sale. Sides retained attorney Jerry Johnson.

¶6 In the absence of the corporation's attorney, Joe Butler, another attorney in his firm, Patrick Duffy, attended the meeting. He relayed the information by letter on March 4, 1996 to Richard Pluimer, attorney for the McCroden faction. The letter stated:

Judy and Maxine have requested that I inform you of an offer they are willing to make to either buy or sell their shares. These parties will either buy or sell at a price of $668.75 per share, with 30 percent down, the balance over 10 years at 8 percent. Of course, the sellers would need some security, and we will work that out at some future date, whoever decides to buy or sell. All lawsuits would be dismissed and all parties would be dismissed as well. This may be the best way for all sides to settle their differences. Let me know what you want to do. I am just the middle man, but I'll be glad to be the conduit for offers or negotiations.

The next board meeting will be on March 15. At the outset of that meeting, this offer will expire. Should the offer not be taken up by either side, then I have been instructed to explore the idea of a "shadow board" which would review the lawsuits presently pending, and make a decision as to what position the board ought to take. I anticipate that the "shadow board" will be a topic of discussion at the next board meeting.

¶7 The March 15 meeting was rescheduled to March 22. In a letter to Pluimer dated March 12, Duffy stated: "I am also told that the offer by the 'Case faction' is intended to remain open until the start of the meeting on the 22nd." The letter indicates that Maxine Case and LaFleur received a copy of the letter.

¶8 On March 22, the parties met for the annual meeting. Due to a disagreement, the meeting ended after a few minutes. It was rescheduled to April 9. ¹

¶9 McColloch claims that the offer to buy or sell was extended at the March 22 meeting to the April 9 meeting. Part of the March 22 meeting was audio taped.

¶10 Pluimer sent a letter to Butler and LaFleur on April 5 conveying McColloch's decision to purchase Maxine Case, Gary Case, and Sides' shares. He included $5,000 earnest money and a stock purchase agreement which paralleled the terms of Duffy's letter. The purchase agreement provided for the shares to remain as security for the unpaid balance of the purchase price. A closing date of April 15 was proposed.

¶11 The check for $5,000 earnest money was not cashed. Instead, LaFleur notified Pluimer on April 15, 1996 that the offer had expired because it had not been timely accepted.

¶12 McColloch, McCroden, and Murdock then initiated discussions with Sides to purchase her shares. Eventually the discussions resulted in a "loan" agreement. The parties signed the initial agreement on April 18. A revised agreement and a release discharging Sides from existing or future claims made in connection with the corporation were signed in August.

¶13 Maxine Case filed a complaint against McColloch and Sides on May 6, 1996 claiming that the loan agreement was actually a sale of Sides' shares in violation of the articles of incorporation. McColloch filed a counterclaim against Maxine Case, Gary Case, and Sides claiming that they breached an agreement to sell their shares. She sought specific performance of the agreement. McCroden and Murdock intervened as plaintiffs on the counterclaim.

¶14 The trial court found that 1) the loan agreement was not a disguised sale and did not violate the articles of incorporation and 2) the parties had not entered into an agreement to sell shares. This is a consolidated appeal of both issues.

STANDARD OF REVIEW

¶15 We review the trial court's findings of fact under a clearly erroneous standard. Fanning v. Iversen, 535 N.W.2d 770, 773 (S.D.1995) (citations omitted). Conclusions of law are reviewed de novo. Id. (citations omitted). "The effects and terms of a contract are questions of law to be resolved by the court. On appeal, this court can read a contract itself without a presumption in favor of the trial court's determination." Baker v. Wilburn, 456 N.W.2d 304, 306 (S.D.1990) (citations omitted).

¶16 1. WHETHER THE MCCOLLOCH-SIDES AGREEMENT WAS A SALE OF SHARES IN VIOLATION OF THE PREEMPTIVE RIGHTS PROVISION OF THE ARTICLES OF INCORPORATION.

¶17 Maxine Case claims that a sale of stock by one shareholder to another shareholder without first offering the stock to the corporation and the other shareholders violates the articles of incorporation of Hickok's, Inc. Article VI of the articles of incorporation grants preemptive rights to the shareholders. It states:

PREEMPTIVE RIGHTS

The following provisions are adopted, creating preemptive rights to acquire additional shares and restricting transfer of common stock.

Any further offering of common stock in the corporation from and after the initial issues of common stock to the incorporators and subscribers shall first be offered at par pro rata to the common stockholders in relation to their then present holdings and the common stockholders shall be given a reasonable time within which to purchase said additional shares. Any shares not so purchased by the common stockholders may then be purchased by any other person.

In the event a stockholder desires to sell his shares of stock, he must first offer them for sale to the corporation, stating the terms of sale and unless his terms are accepted by the corporation within thirty (30) days thereafter, the right of the corporation shall be deemed to have been waived. At the same time as the notice to the corporation, the selling stockholder shall give notice to the other holders of common stock, setting forth the terms of his offer to sell, it being the intention to give the present stockholders a preference in the purchase of such shares in the event the corporation shall not redeem same. Said notice and offer shall state the terms of sale and unless the terms are accepted within thirty (30) days by the corporation or within forty (40) days from the date of said notice by one or all of the other stockholders, the stockholder and corporate preferences set forth herein shall be deemed to be waived and the selling stockholder shall be at liberty to sell to any person or corporation.

Maxine Case argues that the agreement between McColloch and Sides was actually a sale of Sides' shares, rather than a loan with a pledge of her shares as security. Therefore, she claims that the transaction violated the articles of incorporation. We agree.

¶18 The parties do not cite any South Dakota law on this issue. Our research produced no authority directly on point. However, Fletcher Cyclopedia on the Law of Private Corporations states:

The difference between a pledge and a mortgage at common law is that in the pledge the possession only is transferred, while in the sale the title is transferred, either with or...