DiIaconi v. New Cal Corp.

• Citation: 643 P.2d 1234,97 N.M. 782
• Decision Date: 01 April 1982
• Docket Number: 5319.
• Parties: Joseph A. DiIACONI and Haskel Wright, Plaintiffs-Appellants, v. NEW CAL CORPORATION, A New Mexico corporation, and Don R. Miehls, Christel Miehls and Dennis Miehls, as directors of said corporation and individually, Defendants-Appellees.
• Court: Court of Appeals of New Mexico

643 P.2d 1234

97 N.M. 782

Joseph A. DiIACONI and Haskel Wright, Plaintiffs-Appellants, v. NEW CAL CORPORATION, A New Mexico corporation, and Don R. Miehls, Christel Miehlsand Dennis Miehls, as directors of said corporation and individually, Defendants-Appellees.

No. 5319.

Court of Appeals of New Mexico

April 1, 1982

Attorney(s) appearing for the Case

Richard W. Darnell, Neal & Neal, Hobbs, Rosenberg Law Firm, Carlsbad, for plaintiffs-appellants.

B.G. Davis, Paine, Blenden & Diamond, Carlsbad, for defendants-appellees.

OPINION

WALTERS, Chief Judge.

The trial court dismissed the plaintiffs-minority shareholders' derivative action and request for liquidation, brought pursuant to § 53-16-16, N.M.S.A. 1978. They appeal; we affirm.

Plaintiffs DiIaconi and Wright are minority shareholders (11% each) in defendant New Cal Corporation (New Cal), a New Mexico corporation formed in the late 1960's for the purpose of developing a 340-acre tract of land located west of Carlsbad, New Mexico. The individual defendants, Don, Christel and Dennis Miehls, are and were during the material transactions complained of, officers and directors of New Cal. Don is the majority shareholder (56%) and president of New Cal; Christel is his wife and New Cal's secretary-treasurer; and Dennis, their son, is vice-president of the corporation.

In 1975, Don Miehls (Miehls) began development work of Fountain Hills subdivision, a portion of the tract of land belonging to New Cal. Plaintiffs were opposed to this development. During 1976 through 1978, Miehls personally undertook to lay approximately 6000 feet of utility lines, 4000 feet of water lines, and several thousand feet of cablevision, telephone, and electrical lines in the subdivision. Miehls secured financing for the project, directed the development, did a portion of the trenching himself, promoted the sale of lots, sold all but one of the lots himself, and arranged with the City for paving the subdivision's streets. During 1976 he completed construction of a home for himself on one lot in the subdivision, and in 1977 he built another home for a Mr. Truitt. Subsequently, five more residences were built in the subdivision.

The minority stockholders' 1979 suit alleged Miehls's conversion of corporate assets. They requested an accounting, restoration of corporate assets, injunctive relief, removal of corporate officers, appointment of a receiver and, in another count, liquidation of the corporation.

After a hearing on August 30, 1979, the trial court ordered defendants to "construct a proper set of books of account and records for the corporation from December, 1973 to the present date with appropriate authenticating data, documentation and index to all transactions," and restrained the directors from incurring further expenses or disposing of corporate assets. Mr. Sides, an accountanthired by Miehls, prepared the records. They were available to plaintiffs by November 30, 1979.

On August 29, 1980, defendants moved to dissolve the trial court's restraining order. Following a trial on the merits, the trial judge dissolved the restraining order and dismissed the suit. Arguing on appeal that the trial court erred in (1) not rendering a decision regarding the derivative action; (2) overextending the business judgment rule; and (3) refusing to grant their application for liquidation, plaintiffs contend that the following findings of fact are not supported by substantial evidence:

4. At time of trial, extensive accounting work had been done, and the books and records of the corporation were brought current, and made available for inspection by the parties.

5. The major problem with the business relation of the parties is, and has been, the fact that the plaintiffs are minority stockholders in a closely held corporation; the majority stockholder has used his controlling interest in the conduct of the business of the corporation, has made decisions as to the incurring of indebtedness, has planned the development of the land, has made sales, and has made business decisions with respect to the manner in which the affairs of the corporation are to be managed. The majority of the business decisions made by the corporation are questioned by and objected to by the minority stockholders. It is the view of the Court that the problem is inherent in the business relationships of the parties and their respective interests in the corporation, and is not a problem capable of resolution by the Court.

6. The business decisions and the management of the affairs of the corporation by the defendant, by use of his majority stock interest, are within the bounds of discretion, and sufficiently in the interests of the corporation that they should not be disturbed by the Court.

Plaintiffs point to seven instances of allegedly improper self-dealing between Miehls and the corporation that they claim should result in his return of funds and a ditching machine to the corporation. It is their position that Miehls's conduct constituted breach of his fidiciary duties to the stockholders which entitled plaintiffs to liquidation pursuant to § 53-16-16, N.M.S.A. 1978. Three of the seven transactions were authorized at a board of directors meeting; the other four were business decisions made by Miehls acting as the manager and majority stockholder of the corporation. Our review of plaintiffs' contentions has not been materially assisted by the brief of defendants, who respond principally with the argument that the trial decision is supported by substantial evidence. We have examined the three-volume transcript in this case, and discuss the issues raised in the light of the evidence presented.

I.

On September 1, 1977, a special meeting of the board of directors of New Cal was held, at which time the board approved the following matters:

1. Approval of $40,000 as a fee to Miehls in compensation for his efforts commencing in 1975 in developing the subdivision.

2. Sale of Lot # 1, Unit 1, to Don Miehls for $10,000, an amount less than fair market value, upon the consensus that the home built on this lot would obtain necessary advertising for the subdivision.

3. Absorption by the corporation of any loss on the construction of the Truitt home because it would be a benefit to the corporation to continue to have construction on the subdivision in order to further said development.

We summarize plaintiffs' challenges to those decisions.

1. The Management Fee

Plaintiffs contend that the $40,000 management fee authorized by the board wasexcessive and illegal. The trial court heard evidence that Miehls spent 14-16 hours a day developing the subdivision. One exhibit showed that he devoted 100% of his time to that effort. The accountant testified to the reasonableness of the fee and said he had suggested the figure, based upon his familiarity with corporate fees for similar management work by corporate officers.

Regarding plaintiffs' argument that any "agreement to pay a management fee which amounts to a distribution of corporate assets without regard to surplus or net profit" is a violation of §§ 53-11-45 and 53-11-46, N.M.S.A. 1978 (1981 Cum. Supp.), it is not convincing. There is no evidence that payment was made from capital surplus, to which the statutes refer. See definition of "capital surplus" in Comm'r of Corp. & Taxation v. Filoon, 310 Mass. 374, 38 N.E.2d 693, 699 (1941). "Capital surplus" is defined in ABA Model Business Corporation Act § 2(m) as "the entire surplus of a corporation other than its earned surplus." There is no evidence that payment of the fee is properly described as a statutorily impermissible "distribution of corporate assets," as plaintiffs argue. In the context of the statutes to which plaintiffs refer, it is clear that forbidden distributions to "shareholders out of capital surplus of a corporation [of] a portion of its assets, in cash or profits," mean those distributions to shareholders of corporate property paid to the corporation by the shareholders in excess of the capital stock liability, which would render the corporation insolvent, would deprive preferential shareholders of accrued dividends to which they were entitled, or would reduce the corporation's assets below the amount preferential shareholders could claim in the event of involuntary liquidation. Filoon, supra; see Comment to §§ 2, 46, ABA Model Business Corporation Act., Vol. I, pp. 34-36, 938-939. The management fee was not a "distribution" of capital surplus.

2. The Price of the Lot to Miehls.

Plaintiffs assert that Miehls had a lot deeded to himself, valued at $16,800, for which he paid nothing. Miehls set the original price on the lots in the subdivision and priced all of them at $16,800. None of the lots sold for the amount at which they were originally priced; in fact, at least three lots next to Miehls sold for $12,700. The directors set the price on Miehls' lot at $10,000, allowing a reduced price in exchange for the value of advertising they deemed inherent in construction at the subdivision site. Ten thousand dollars of the $40,000 fee authorized by the directors to be paid to Miehls was allocated to pay for the lot upon which he built his home. The assertion that Miehls paid nothing for the lots is contrary to the evidence; the court obviously agreed that the sale of Miehls was not detrimental to the corporation (Finding 6).

3. The Truitt Transaction.

In plaintiffs' view, Miehls constructed the Truitt home in his individual capacity, through his individual proprietorship known as Miehls Enterprises, and then persuaded a board composed of family members to approve the corporation's absorption of any loss incurred in its construction. The contracts for buying the lot and building the Truitt home were executed by Don Miehls and Miehls Enterprises. Neither Miehls nor New Cal had a contractor's license at the time. Miehls considered that he was building the home on behalf of the corporation. The testimony of Miehls and the minutes of the directors meeting reflect...