Fincher v. Claiborne Butane Co., Inc.

• Decision Date: 29 August 1977
• Docket Number: No. 13311,13311
• Parties: Philip G. FINCHER et al., Plaintiff-Appellant, v. CLAIBORNE BUTANE COMPANY, INC., Defendant-Appellee.
• Court: Court of Appeal of Louisiana — District of US

Page 1014

349 So.2d 1014

Philip G. FINCHER et al., Plaintiff-Appellant, v. CLAIBORNE BUTANE COMPANY, INC., Defendant-Appellee.

No. 13311.

Court of Appeal of Louisiana, Second Circuit.

Aug. 29, 1977.

En Banc. Rehearing Denied Sept. 26, 1977.

Shaw & Shaw by W. M. Shaw, Homer, for plaintiff-appellant.

Blanchard, Walker, O'Quinn & Roberts by Clyde W. Thurmon, Shreveport, for defendant-appellee.

Before HALL, MARVIN and JONES, JJ.

MARVIN, Judge.

As minority stockholders in defendant corporation, plaintiffs appeal a judgment rejecting their demand that the corporation be placed in receivership because of alleged gross mismanagement by the majority stockholders as officers and directors of the corporation. We affirm.

After suit was filed on August 26, 1974, the original plaintiff's wife died and her heirs to the community-owned stock were joined as parties plaintiff. We shall refer to plaintiffs in the singular case. Plaintiff's demand is founded upon R.S. 12:151, which states in part:

"A. The court may . . . appoint a receiver . . . when it is made to appear . . .

"(1) . . . that the directors or officers are jeopardizing the rights of its shareholders . . . by grossly mismanaging the business, or by committing gross and persistent ultra vires acts, or by wasting, misusing or misapplying the assets of the corporation."

The lower court also rejected the corporation's reconventional demand for attorney's fees against plaintiff under R.S. 12:151(D), finding that the statutory requisite of bad faith had not been shown. We also affirm in this respect.

Original plaintiff is a brother-in-law to the president, principal stockholder of the corporation. The business of the corporation began as a partnership in 1945 and was incorporated in 1948. In 1950, the original plaintiff became an employee, stockholder, director, and officer (vice-president) of the corporation. He remained in this employment until he was terminated. Two weeks after his termination he filed suit against the corporation in 1974. He and his children own 21 percent of the corporate stock. The remaining stock is owned or controlled by the corporate president.

The lower court correctly set forth the applicable legal principles, against which plaintiff's claims of six acts of gross mismanagement must be weighed. These principles, with citations omitted, are as follows:

"While the provisions of (the statute) set forth the causes for which a receivership may be sought by a shareholder, the appointment of a receiver is not mandatory but is subject to sound judicial discretion. In determining whether or not the facts justify and make advisable a receivership, in the absence of a clear showing of fraud or breach of trust the courts are slow to interfere, will order the appointment of a receiver only when it is manifest that it should be made, and are influenced by a consideration of whether such action would serve a useful purpose. This court will not disturb the ruling of the trial judge in his refusal to appoint a receiver except in a case where it clearly appears that the interests of the minority of stockholders are in imminent danger . . . " Peiser v. Grand Isle, 221 La. 585, 60 So.2d 1 (1952).

" . . . receivership of a corporation, as a remedy, looks only to the prevention of future injuries rather than to the redress of past grievances." Kinnebrew v. Louisiana Ice Co., 216 La. 472, 43 So.2d 798 (1949).

" ' . . . The effect of appointing a receiver being to take the property of the corporation out of the control of its own officers to whom it has been entrusted by its stockholders, the courts proceed with extreme caution in the exercise if so summary a power, and in construing such statutes they are inclined to give them a strict construction. * * *

'A minority of the stockholders of a corporation is not entitled to a receiver because of dissatisfaction with the policy and management of a majority of the officers and directors in the absence of any showing of fraud or insolvency. And especially will the appointment of a receiver be denied where a corporation is solvent and its business prosperous, and it is not sought to have it wound up, since, in such case, the wrongs complained of may be remedied under the ordinary powers of a court of equity and without the appointment of a receiver. * * *

'The appointing of a receiver to a healthy going corporation, is calculated to affect injuriously its business and affairs; and such should not be done where the complaining party has other adequate remedies. The statute under which the appointment in this case is sought should be strictly construed . . . ' " Reynaud v. Uncle Sam Planting & Mfg. Co., 152 La. 811, 94 So. 405 (1922).

The foregoing principles were approved in Coleman v. La Salle Creosoting Company, 129 So.2d 311 (La.App. 3d Cir. 1961).

It should be noted at this juncture that plaintiff, as vice-president, sales manager, and director of the corporation, was active in its management until he suffered a severe and disabling heart attack in 1972. Plaintiff remained an employee after his heart attack, although disabled from fully performing his duties, until his discharge in 1974.

The defendant corporation, for federal income tax purposes, is a small business subchapter S corporation in which the stockholders served as employees and officers. Each stockholder, including plaintiff, at times requested and drew advances on expected dividends from the corporation. These advances, in essence, were loans by the corporation, for which the corporation charged five percent simple interest. At other times, on dividends declared but not immediately paid to the stockholders, the corporation was charged and eventually paid to the stockholders five percent interest. This five percent loan policy existed for about 20 years and was applied to the stockholders as well as to the corporation.

The lower court did not pass on the corporation's contention that plaintiff, because of his participation in ratification or acquiescence of the policies of the corporation, was legally estopped to claim gross mismanagement. The lower court instead, considered the merits of each of plaintiff's claims of gross mismanagement and found against plaintiff. We do not disapprove of the lower court's approach because we find the record supports the lower court's denial of plaintiff's claims of gross mismanagement. We observe, however, that in any event, because of plaintiff's participation in the management of the corporation as an officer, director and employee, and his failure to challenge existing corporate policy, plaintiff is estopped to complain of gross mismanagement. ¹

THE ALLEGED ACTS OF GROSS MISMANAGEMENT

(1) Failure of the corporation to hold regular meetings of its stockholders and directors and to keep minutes thereof. In 1962, the former partner of the corporate president terminated his employment and stockholder relationship with the corporation. The stock of this former partner was eventually acquired by the corporate president and plaintiff. Before and since 1962, the stockholder-employees, who were also the directors and officers, consulted sometimes daily about corporate policy and affairs. There were few formal meetings at which minutes were kept.

The better practice is to conduct formal meetings and to keep minutes as our corporations law contemplates. The circumstances shown, with the stockholders being few and (at the time complained of) friendly, do not constitute such acts of gross mismanagement which will compel receivership. Racoby v. Peoples Furniture Co., 175 La. 383, 143 So. 334 (1932); Shelton v. Destrehan Mercantile Co., 151 La. 808, 92 So. 344 (1922).

The five percent loan policy. The record shows that every stockholder, including plaintiff, at one time or another had received advance dividends (loans) or had been owed declared dividends. At the time suit was filed, the corporate president, who, because of his majority ownership, was involved as a debtor or creditor of the corporation to a greater degree than plaintiff, was not a debtor, but a creditor of the corporation. Assuming that a loan to a stockholder is an act of mismanagement, we are not satisfied that receivership should follow in these circumstances. The corporation is shown to be solvent. There was no loan to any stockholder in existence at the time, or since, plaintiff filed suit. Receivership is granted in cases where there is imminent danger of the rights of minority stockholders being destroyed by a fraudulent or illegal practice intentionally designed to dissipate the assets of the corporation. West v. Certified Credit Corporation, 162 So.2d 589 (La.App. 2d Cir. 1964). Where the fraudulent or illegal intent is not present and the corporation is otherwise a solvent and going concern, injunction or other similar remedy, and not receivership, is the relief favored by law.

(3) Continuing payment of salaries and other benefits to corporate employees who are disabled or who are not performing their duties. Plaintiff's complaint is particularly directed at the wife of the corporate president. It is shown that the wife was employed by the corporation as an accountant and stenographer from 1950 until June 30, 1974. In 1973, she suffered a temporarily disabling illness and thereafter worked only intermittently at the office and at her home. During this approximate 18-month period, she was paid her usual salary and had the use of a corporate automobile.

The record also shows that this practice was generally followed for varying lengths of time as to other employees (even those who were not stockholders) who became wholly or...