Estate of Lien v. Pete Lien & Sons, Inc.

• Citation: 740 N.W.2d 115,2007 SD 100
• Decision Date: 26 September 2007
• Docket Number: No. 24286.,24286.
• Parties: The ESTATE OF Brustuen H. LIEN a/k/a Bruce Lien and Deanna B. Lien, Plaintiffs and Appellees, v. PETE LIEN & SONS, INC., Defendant and Appellant.
• Court: Supreme Court of South Dakota

740 N.W.2d 115

2007 SD 100

The ESTATE OF Brustuen H. LIEN a/k/a Bruce Lien and Deanna B. Lien, Plaintiffs and Appellees, v. PETE LIEN & SONS, INC., Defendant and Appellant.

No. 24286.

Supreme Court of South Dakota.

Argued on May 22, 2007.

Decided September 26, 2007.

Rehearing Denied November 2, 2007.

Mitchell Peterson and Roberto A. Lange of Davenport, Evans, Hurwitz & Smith, Sioux Falls, South Dakota, Attorneys for plaintiffs and appellees.

Larry M. Von Wald and Ted L. McBride of Beardsley, Jensen & Von Wald, Jeffrey G. Hurd of Bangs, McCullen, Butler, Foye & Simmons, Rapid City, South Dakota, Attorneys for defendant and appellant.

TIEDE, Circuit Judge.

[¶ 1.] This case involves the continuing conflict between Bruce Lien (Bruce) and Deanna Lien (Deanna) and Pete Lien & Sons, Inc. (PLS or corporation). We previously decided Lien v. Lien, 2004 SD 8, 674 N.W.2d 816 (Lien I), in which Bruce brought an action against PLS and its directors alleging minority shareholder oppression, breach of fiduciary duty, and tortious interference with prospective business relations or expectancy and also sought dissolution based on shareholder deadlock. We held that dissolution and liquidation of the corporation's assets was not warranted and that Bruce had not established minority shareholder oppression or tortious interference. In this appeal, the trial court granted summary judgment in favor of Bruce finding that PLS breached a severance agreement with Bruce and a lease and option to purchase with Bruce and Deanna. PLS appeals. We reverse and remand.

FACTS AND PROCEDURE

[¶ 2.] The history of PLS is outlined in Lien I. PLS was founded in 1944 as a partnership with Bruce, his brother, Charles Lien (Chuck), and their father, Pete Lien, Sr., as the co-equal partners.¹ The business engages in the production of limestone aggregates, lime, sand and gravel, ready mix concrete, masonry block and steel fabrication, reinforcement and warehousing in the Rapid City, South Dakota area and several other states. It was incorporated in 1952 as a South Dakota corporation with the three partners as equal shareholders. Since inception the corporation has restricted the right of a shareholder to freely sell or transfer shares other than to another shareholder. Over the years, Pete Lien Sr. gifted and sold his stock to Bruce and Chuck. When their father died in 1969, Bruce and Chuck inherited the remainder of his stock and each became fifty percent shareholders of the corporation.

[¶ 3.] Following our decision in Lien I, Bruce's relationship with his brother, Chuck, and PLS remained contentious. In August 2005 PLS became aware that Bruce's wife, Deanna, had been appointed Bruce's guardian and conservator. Until that time, Bruce had been paid as an employee of PLS, despite the fact that for several years he had not had any functions or duties associated with PLS. PLS claims that it was concerned about the possible liability of continuing Bruce's employment with PLS after he had been judicially declared incapable of handling his own affairs. The decision was made to terminate Bruce's employment. The PLS directors decided to provide Bruce a severance package which would continue his salary, bonuses and corporate perquisites until August 15, 2006.² This action was unilaterally taken by the Board and Bruce concedes in his brief that he accepted it without objection. According to an affidavit from Chuck, the directors were particularly concerned about their fiduciary duties to Bruce as a shareholder, especially in light of Lien I, and did not want to deprive Bruce of a return on his shares in PLS. According to Chuck, it was intended that before August 15, 2006, the newly appointed PLS dividend committee would adopt criteria for the directors' declaration of dividends as a substitute for the salary, bonuses, and perquisites that had been provided to Bruce and Chuck over the years as a means of providing them with returns on their stock holdings.

[¶ 4.] By a hand-delivered letter dated February 1, 2006, Deanna gave notice of her intent to sell all of the shares of PLS stock that she and Bruce owned³ to Oldcastle Materials, Inc. (Oldcastle). The notice was provided pursuant to Article VI of the PLS Amended Articles of Incorporation. The notice stated in part:

In my individual capacity and as guardian and conservator for Bruce H. Lien, I have entered into a Stock Purchase Agreement with Oldcastle Materials, Inc., dated as of January 31, 2006, a copy of which is attached for your reference. The purchase price for the Shares is $35,250,000, subject to the terms and conditions set forth in the Stock Purchase Agreement. The full amount of the purchase price consideration has been paid into an escrow account pursuant to the terms of the Agreement and the enclosed Escrow Agreement.

(emphasis added). According to the Articles of Incorporation, the Board of Directors of PLS had ten days in which to exercise the option to purchase the shares for the corporation or on behalf of any shareholders.⁴

[¶ 5.] The Stock Purchase Agreement provided that Oldcastle would pay the aggregate amount of $35,250,000 on the closing date, with the amount of $5,000,000 withheld from the Seller in an Escrow Account. This was identified as the "Deferred Amount" which was to be distributed to Bruce and Deanna if PLS's profits before interest, taxes, depreciation and amortization (PBITDA) was equal or greater than set forth below for the fiscal year ending December 31, 2006:

                                    Aggregate Amount of
                                     Deferred Amount
                  Target PBITDA Released to Seller
                  $16,000,000        $5,000,000
                  $15,000,000        $3,000,000
                  $14,000,000        $1,000,000
                

Any remaining portion of the Deferred Amount would be returned to Oldcastle in accordance with the terms of the Escrow Agreement.⁵

[¶ 6.] In the Stock Purchase Agreement under the heading of "Representations and Warranties of the Seller," Bruce and Deanna identified transactions by PLS with related parties, including the severance agreement with Bruce and a lease and option agreement between PLS, Bruce and Deanna relating to the PLS-owned house in which Bruce and Deanna lived. Under the heading of "Covenants of the Seller," the agreement provided:

The Seller shall not pursue any claim or commence any Proceedings against the Company (a "Company Claim") without obtaining the prior written consent of the Buyer, such consent to be withheld in the Buyer's sole discretion. Upon the request of the Buyer, the Seller shall assign any Company Claim to the Buyer to the extent such assignment is allowed under Applicable Law. The Seller will cooperate with the Buyer with respect to any Company Claim.⁶

The agreement provided that it would be governed by the laws of the State of New York. The agreement contained a release of liability by Bruce and Deanna. Finally, the Stock Purchase Agreement contained a termination fee in the amount of $5,000,000 to be paid to Oldcastle in the event that the agreement was terminated for reasons other than as a result of a breach by Oldcastle. Therefore, Oldcastle was to receive $5,000,000 from Bruce and Deanna if PLS exercised its right of first refusal and purchased the PLS stock owned by Bruce and Deanna.

[¶ 7.] On February 6, 2006, PLS responded to the notice sent by Deanna with a document entitled "Exercise and Notice of Election on Right of First Refusal." It provided in part:

The purchase of the Seller's Shares by the Company shall be subject to the terms set forth in the Stock Purchase Agreement and the Oldcastle Escrow Agreements, which the Company agrees to be legally bound thereby to the same extent Oldcastle is legally bound thereunder. The Purchase Price payable under the Stock Purchase Agreement shall be deposited in an escrow account with The Bank of New York and made available for disbursement to Seller on or before February 10, 2006, subject to the terms of the Stock Purchase Agreement and the Oldcastle Escrow Agreement.

(emphasis added). On February 10, 2006, PLS deposited $35,250,000 with the Bank of New York as provided in the Escrow Agreement. Bruce's and Deanna's shares were transferred to PLS.

[¶ 8.] Following the transfer of stock, Pete Lien (Pete), President of PLS, notified Deanna on March 8, 2006, that the salary, bonuses and perquisites which otherwise would have been paid to Bruce under the severance agreement were discontinued effective February 11, 2006, the day following the sale of Bruce's PLS stock. By letter dated April 3, 2006, Deanna was notified that PLS was terminating her and Bruce's tenancy in the PLS-owned residence in which they resided. They were told to vacate the property on or before June 1, 2006.

[¶ 9.] Within approximately ten days of the April 3, 2006 letter, this litigation was commenced alleging breach of the lease and option agreement for the PLS-owned house and breach of the severance agreement. Agreeing that there were no material facts genuinely in dispute, both parties moved for summary judgment. PLS argued that it purchased Bruce's and Deanna's shares under the terms and conditions of the Stock Purchase Agreement with Oldcastle. It argued that the release, covenant not-to-sue and assignment of claims provisions of that agreement discharged PLS's obligations to Bruce and Deanna under the severance agreement and the lease and option. The trial court concluded that under PLS's Articles of Incorporation, Bruce and Deanna were entitled to receive the amount of money which Oldcastle had agreed to pay and the only consideration to which PLS was entitled in return was the stock in question. It concluded that the release and covenant not-to-sue did not relieve PLS of liability and that there was no legal basis for PLS to discontinue its severance package to Bruce prior to August 15, 2006. Further, the trial court concluded that the lease and option to purchase was a life-estate in favor of Bruce and Deanna until they...