Combs v. Pricewaterhousecoopers Llp

• Decision Date: 08 September 2004
• Docket Number: No. 03-1222.,No. 03-1080.,03-1080.,03-1222.
• Citation: 382 F.3d 1196
• Parties: Barry COMBS, Plaintiff-Appellant, v. PRICEWATERHOUSECOOPERS LLP, Defendant, and Ann Bennett, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

382 F.3d 1196

Barry COMBS, Plaintiff-Appellant, v. PRICEWATERHOUSECOOPERS LLP, Defendant, and Ann Bennett, Defendant-Appellee.

No. 03-1080.

No. 03-1222.

United States Court of Appeals, Tenth Circuit.

September 8, 2004.

Appeal from the United States District Court for the District of Colorado, Marcia Krieger, J.

COPYRIGHT MATERIAL OMITTED

Thomas J. Kimmell, Zarlengo & Kimmell, LLC, Denver, CO, appearing for Plaintiff-Appellant.

Cindy C. Oliver (Jennifer Clark, with her on the briefs), Rothgerber, Johnson & Lyons, LLP, Denver, CO, appearing for Defendant-Appellee.

Before TACHA, Chief Circuit Judge, PORFILIO^*, and LUCERO, Circuit Judges.

TACHA, Chief Circuit Judge.

Plaintiff-Appellant Barry Combs, a minority shareholder and former employee of Allied Information Solutions, Inc. ("AIS"), alleged six grounds for breach of fiduciary duty against Defendant-Appellee Ann Bennett, the majority shareholder and only other employee of AIS. After removal to federal court, Ms. Bennett moved for summary judgment arguing, in part, that Mr. Combs must bring his allegations as a derivative action. The District Court granted Ms. Bennett's motion. Mr. Combs then filed a motion to amend his complaint to state a derivative action, which the District Court denied as moot. On appeal, Mr. Combs challenges both rulings. We take jurisdiction under 28 U.S.C. § 1291 and AFFIRM.

I. BACKGROUND

AIS is a close corporation organized under Colorado law. It has never had more than six shareholders. In 1987, Mr. Combs became a minority shareholder of AIS and began working there. At all times relevant to this appeal, Ms. Bennett, the majority shareholder of AIS, has been the president, chairman of the board, and sole other employee of AIS.

In the late summer of 1999, PriceWaterhouse Coopers acquired all the assets of AIS, although AIS remains an extant corporate entity. As part of this transaction, both Ms. Bennett and Mr. Combs became employees of PriceWaterhouse Coopers. Approximately four months after this transaction, PriceWaterhouse Coopers terminated Mr. Combs' employment.

After his discharge, Mr. Combs brought numerous causes of action against both PriceWaterhouse Coopers and Ms. Bennett in Colorado state court, including an age discrimination suit against PriceWaterhouse Coopers under 29 U.S.C. § 621 et seq. ("ADEA"). The ADEA claim enabled PriceWaterhouse Coopers and Ms. Bennett to remove the case to federal court, see 28 U.S.C. § 1441(c), where the District Court took supplemental jurisdiction over Mr. Combs' numerous state law claims, see 28 U.S.C. § 1367(a). Having subsequently reached a settlement agreement with Mr. Combs, PriceWaterhouse Coopers is not before us on appeal. We therefore turn our focus to the claims against Ms. Bennett.

Mr. Combs rested his sole action against Ms. Bennett, breach of fiduciary duty, on six alleged instances of her misconduct. Much of the factual basis for these claims arise out of an August 1999 audit of AIS. Although Mr. Combs invited the other minority shareholders to participate in the audit, they declined, thus leaving him with the entire financial burden of the audit.

In the District Court, Ms. Bennett filed a motion for summary judgment, offering three supporting arguments. First, she contended that Mr. Combs lacked standing to bring these claims in his individual capacity, asserting that he must bring this suit as a derivative action on behalf of the corporation. Second, Ms. Bennett presented a statute of limitations argument. Third, she argued that Mr. Combs could not carry his burden of proof as a matter of law. On January 31, 2003, the District Court, relying solely on Ms. Bennett's first ground, granted summary judgment and discharged all claims against Ms. Bennett. On February 28, 2003, Mr. Combs appealed the summary judgment ruling.

On February 10, 2003, Mr. Combs filed a motion to amend his complaint to state a derivative action. See Fed.R.Civ.P. 15(a). On April 14, 2003, based on its previous summary judgment ruling, the District Court denied the motion as moot. Mr. Combs challenges this ruling in a separately filed appeal ("motion to amend appeal"). In September 2003, Ms. Bennett moved to consolidate the two appeals, which was granted. She also moved this Court, pursuant to 10th Cir. R. 27.2(A)(1), to dismiss the motion to amend appeal, arguing that mootness and lack of appellate jurisdiction preclude review of the District Court's decision. We consider this argument, along with the merits of Mr. Combs' appeal, below.

II. SUMMARY JUDGMENT

Mr. Combs presents two arguments against the necessity of a derivative action in this case. First, he asserts that he may sue in his individual capacity because Ms. Bennett "cause[d] him injury as a stockholder, unique to himself and not suffered by the other stockholders." Nicholson v. Ash, 800 P.2d 1352, 1357 (Colo.Ct.App. 1990). Second, he urges that, because AIS is a close corporation, filing this suit in a derivative capacity would not further the policies served by the derivative action procedure. Applying Colorado law, we disagree.

A. Standard of Review

We review the District Court's "grant of summary judgment de novo, applying the same standards used by the district court." Byers v. City of Albuquerque, 150 F.3d 1271, 1274 (10th Cir.1998). Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56(c). We view the evidence, and draw reasonable inferences therefrom, in the light most favorable to the nonmoving party. Byers, 150 F.3d at 1274.

B. Standing as a Unique Shareholder

To escape summary judgment on his breach of fiduciary duty claim, Mr. Combs must put forth evidence of the elements of a breach of fiduciary duty, see Graphic Directions, Inc. v. Bush, 862 P.2d 1020, 1022 (Colo.Ct.App.1993) (providing elements), and also establish that he has standing, see River Mgmt. Corp. v. Lodge Props. Inc., 829 P.2d 398, 403 (Colo.Ct. App.1991).¹ Accordingly, the District Court based the summary judgment order on its finding that Mr. Combs lacked standing as a matter of law.

Mr. Combs contends that he suffered a breach of fiduciary duty from the fact that Ms. Bennett: (1) paid herself a salary in excess of what had been approved by AIS's board of directors; (2) paid for personal expenses out of AIS funds; (3) failed to disclose the pending sale of AIS to the shareholders in a timely manner; (4) pursued business opportunities for herself instead of for AIS; (5) falsely promised him continued employment with PriceWaterhouse Cooper; and (6) negotiated a lucrative salary from PriceWaterhouse for herself without similarly providing for Mr. Combs.

Absent an exception to the general rule, Mr. Combs lacks standing to bring these claims in an individual capacity. Under Colorado law, "a stockholder cannot maintain a personal action against a director or other third party whose action causes harm to the corporation. Generally, it is the corporation, or a stockholder in a derivative action . . ., who must pursue such a claim." Nicholson, 800 P.2d at 1356. Moreover, Colorado law states expressly that Mr. Combs' first and second contentions—claiming waste and mismanagement of corporate assets—must be brought as a derivative action, even in close corporations having but one minority shareholder. River Mgmt. Corp., 829 P.2d at 404; see also O'Malley v. Casey, 42 Colo.App. 85, 589 P.2d 1388 (1979) (filing of derivative action is proper for claims regarding excessive salaries); Ireland v. Wynkoop, 36 Colo.App. 205, 539 P.2d 1349, 1354, 1357 (1975) (same for suits alleging wrongful use). As to his third contention, although close corporation "shareholders reasonably can expect to be informed of all listings [in a timely manner] and have a right to expect that offers to purchase will be pursued and negotiated in good faith[,]" Colt v. Mt. Princeton Trout Club, Inc., 78 P.3d 1115, 1120 (Colo.Ct.App.2003), such a claim is properly pursued as a derivative action, id. at 1116. Such is also the case with Mr. Combs' fourth contention regarding self-dealing. Ireland, 539 P.2d at 1357. As the District Court noted, the fifth and sixth grounds, as they allege injuries to Mr. Combs as an employee, simply fail on the merits as a matter of law.²

Mr. Combs argues that this general prohibition against individual standing does not apply because Ms. Bennett "cause[d] him injury as a stockholder, unique to himself and not suffered by the other stockholders." Nicholson, 800 P.2d at 1357. If he can satisfy this exception to the general rule, then Mr. Combs may pursue his fiduciary duty claims in his individual capacity. Id.; see also In re Stat-Tech Int'l Corp., 47 F.3d 1054, 1059-60 (10th Cir.1995) (applying Colorado corporate law).

Mr. Combs offers four reasons why his fiduciary duty claims fall within the Nicholson exception: (1) Ms. Bennett's misuse of funds deprived AIS of money to pay him a higher salary; (2) he was the only shareholder to perform an audit; (3) Ms. Bennett's untimely disclosure of the pending sale of AIS inhibited his ability to negotiate a lucrative salary from PriceWaterhouse Coopers; and (4) Ms. Bennett's promise of continued employment with PriceWaterhouse Coopers affected him disproportionately.

As the District Court noted, Mr. Combs' first, third, and fourth claims of "uniqueness" are injuries in his status as an employee, not a stockholder. As such, the District Court held that they failed to establish a unique injury to Mr. Combs in his status as a shareholder. Citing many non-Colorado cases, Mr. Combs argues on appeal that this distinction between the status as a shareholder and status as an employee is not meaningful in the close corporation context because "[t]he denial of employment to the...