Dewey v. Bechthold
| Citation | 384 F.Supp.3d 971 |
| Decision Date | 21 May 2019 |
| Docket Number | Case No. 18-CV-1739-JPS |
| Parties | Nancy DEWEY individually and as a trustee, The Nancy Dewey Living Trust, The Nancy Dewey 2015 NEA Grantor Retained Annuity Trust, The Nancy Dewey 2015 P&D Grantor Retained Annuity Trust, The Irrevocable Trust for The Grandchildren of Nancy and Douglas Dewey, John Dewey individually and as a trustee, The John D. Dewey Living Trust, The John D. Dewey Irrevocable Children's Trust, The Abigail Dewey Irrevocable Trust, The Erin Dewey Irrevocable Trust, The Ian Dewey Irrevocable Trust, The Sheamus Dewey Irrevocable Trust, The Abigail Dewey Descendants Trust, The Erin Dewey Descendants Trust, The Ian Dewey Descendants Trust, The Separate Trusts for Ian Dewey, Sheamus Dewey, Erin Dewey, Abigail Dewey, and The Sheamus Dewey Descendants Trust, Plaintiffs, v. Kurt BECHTHOLD, Mark Filmanowicz, David Bechthold, Payne & Dolan, Inc., Northeast Asphalt, Inc., Construction Resources Management, Inc., Zenith Tech, Inc., and Timberstone of Richfield, Inc., Defendants. |
| Court | U.S. District Court — Eastern District of Wisconsin |
Benjamin R. Prinsen, Stuart J. Check, Stephen E. Kravit, Kravit Hovel & Krawczyk SC, Milwaukee, WI, Brian M. Lutz, Gibson Dunn & Crutcher LLP, San Francisco, CA, Martie P. Kutscher, Gibson Dunn & Crutcher LLP, Palo Alto, CA, Tyler H. Amass, Gibson Dunn & Crutcher LLP, Denver, CO, for Plaintiffs.
Thomas L. Shriner, Jr., Philip C. Babler, Anne-Louise Treveni Mittal, Bryan B. House, Foley & Lardner LLP, Milwaukee, WI, for Defendants.
J.P. Stadtmueller, U.S. District Judge On February 11, 2019 Plaintiffs filed an amended complaint alleging fraud and violations of Wisconsin state law in connection with their rights as shareholders. (Docket #45). On March 7, 2019, Defendants filed a motion to dismiss, in which they sought dismissal of Counts Four and Five of the amended complaint. (Docket #50). Count Four seeks declaratory judgment that a transfer restriction implemented in 2014 (the "2014 Restriction") does not apply to John Dewey ("John")'s shares because his shares were issued prior to the 2014 Restriction, and because he did not vote for or agree to the 2014 Restriction. Count Five seeks declaratory judgment that the 2014 Restriction is unenforceable. The motion to dismiss is fully briefed. For the reasons stated below, Defendants' motion will be granted in part and denied in part.
Federal Rule of Civil Procedure 12(b) provides for dismissal of complaints which, among other things, fail to state a viable claim for relief. Fed. R. Civ. P. 12(b)(6). To state a claim, a complaint must provide "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). In other words, the complaint must give "fair notice of what the...claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The allegations must "plausibly suggest that the plaintiff has a right to relief, raising that possibility above a speculative level[.]" Kubiak v. City of Chicago , 810 F.3d 476, 480 (7th Cir. 2016) (citation omitted). In reviewing the complaint, the Court is required to "accept as true all of the well-pleaded facts in the complaint and draw all reasonable inferences in favor of the plaintiff." Id. at 480–81.
Plaintiffs in this case consist of minority shareholders of several closely held corporations, as well as various related trusts and beneficiaries. Defendants are the majority shareholders and five companies. The key players among Plaintiffs are Nancy Dewey ("Nancy") and her son, John, (collectively, "the Deweys"), who are eager to sell their shares in the companies but are having difficulty valuing (and thus selling) their shares. The key players among Defendants are Kurt Bechthold ("Kurt") and David Bechthold ("David") (collectively, "the Bechtholds"), who are Nancy's brothers, and who run the defendant companies ("the Defendant Companies").
Id. Plaintiffs understand this definition to mean that the "book value" was based on the shares' "market value." Id. John's shares were subject to the 1967 Restriction.
In 1993, the Defendant Companies enacted another transfer restriction bylaw (the "1993 Restriction") which elaborated that the option price would be calculated as:
[T]he book value of the stock determined by the corporation's balance sheet included in its financial statements and stated in accordance with generally accepted accounting principles consistently applied as of the end of the calendar month preceding the offer to the corporation and in such balance sheet no value shall be assigned to any good will but the value of all contracts and work in progress shall be included on a percentage of completion basis in accordance with generally accepted accounting principles.
Id. at 16 (). According to Plaintiffs, this new definition of option value required the book value to be calculated solely on "the corporation's balance sheet included in its financial statements," which effectively allows the controlling shareholders to set the book value. John did not vote for the 1993 Restriction.
In 2014, another restriction was created to protect certain inter-trust transfers. John objected to the 2014 Restriction to the extent that it contained the right-of-refusal language from the 1993 Restriction—which he had not voted for—but agreed with its protective effects on the trusts. He was led to believe that he could vote in favor of the 2014 Restriction while retaining his right to challenge the right-of-refusal provision to which he did not agree. Accordingly, John voted in favor of the 2014 Restriction. When John subsequently tried to value and sell his shares, he claims that he was unfairly held to the 2014 Restriction's definition of option value as book value. Because of this, he claims that Defendants fraudulently induced John into voting for the 2014 Restriction. Plaintiffs allege that the 2014 Restriction gives the Bechtholds the ability "to manipulate the books in order to force minority stockholders to sell their shares to the controllers at an artificially-depressed price," which makes the right-of-refusal provision "unreasonable and unenforceable" as a matter of law. Id. at 18.
Plaintiffs seek declaratory judgment that the 2014 Restriction does not apply to John and that it is generally invalid and unenforceable. Defendants contend that claim preclusion bars John from arguing that the 2014 Restriction does not apply to him ("Count Four").1 They further contend that the claim for declaratory judgment regarding the validity of the right-of-refusal provision ("Count Five") must be dismissed because it is barred by the statute of limitations and issue preclusion. Defendants also argue that the 2014 Restriction is presumptively valid; that the "manifestly unreasonable" requirement does not apply to right-of-refusal restrictions; that requiring a book value purchase price does not make the right-of-refusal provision unreasonable or unenforceable; and that there is no conflict of interest that would make the provision unenforceable. Finally, Defendants argue that even if John is not subject to the 2014 Restriction, he is still subject to the 1967 Restriction, which is not substantially different from the 2014 Restriction. For the reasons explained below, the Court will dismiss Count Five.
3.1 Count Four – 2014 Restriction Application to John
Plaintiffs seek declaratory judgment that the "2014 Restriction does not apply to John's shares because his shares were issued prior to the enactment of the bylaws containing the 2014 Restriction and the Defendant Companies are estopped from asserting that John voted in favor of the 2014 Restriction." Id. at 38. Under Wisconsin law, a transfer restriction "may not affect shares and other securities issued before the restriction is adopted unless the holders of the shares and other securities are parties to the transfer restriction agreement or vote in favor of the transfer restriction." Wis. Stat. § 180.0627(2)(b). Plaintiffs have alleged facts that John did not vote in favor of the right-of-refusal provisions contained in the 2014 Restriction which, in most cases, would be sufficient to survive the motion to dismiss stage. However, Defendants have argued that preclusion bars this claim as a matter of law, which will be discussed below.
3.1.1 Preclusion
Defendants argue that Count Four is barred by claim preclusion. The Court looks to Wisconsin law to assess the preclusive effect of a ruling of a Wisconsin state court, and to determine the nature and scope of preclusion. 28 U.S.C. § 1738 ; Marrese v. Am. Acad. of Orthopaedic Surgeons , 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). For the reasons stated below, the Court finds that Count Four is not barred by claim preclusion.
Claim preclusion, also known as res judicata , applies "when there is (1) a prior suit that ended in a final...
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