Franks v. Franks

• Decision Date: 24 September 2019
• Docket Number: No. 343290,343290
• Citation: 944 N.W.2d 388,330 Mich.App. 69
• Parties: Jeffrey FRANKS, Michael William Franks, as the Successor Trustee of the Franks Family Trust, and Willis Franks, Plaintiffs-Appellees, v. Newell A. FRANKS II, Brian McConnell, Leean McConnell, also known as LeeAnn McConnell, also known as Leann McConnell, David Franks, Lawrence Franks, and Burr Oak Tool, Inc., Defendants-Appellants.
• Court: Court of Appeal of Michigan — District of US

330 Mich.App. 69

944 N.W.2d 388

Jeffrey FRANKS, Michael William Franks, as the Successor Trustee of the Franks Family Trust, and Willis Franks, Plaintiffs-Appellees,

v.Newell A. FRANKS II, Brian McConnell, Leean McConnell, also known as LeeAnn McConnell, also known as Leann McConnell, David Franks, Lawrence Franks, and Burr Oak Tool, Inc., Defendants-Appellants.

No. 343290

Court of Appeals of Michigan.

Submitted June 5, 2019, at Grand Rapids.

Decided September 24, 2019, 9:15 a.m.

Mantese Honigman, PC (by Gerard V. Mantese, Ian M. Williamson, Douglas L. Toering, Troy, and Fatima M. Bolyea) for plaintiffs.

Warner Norcross + Judd LLP, Kalamazoo (by Christopher E. Tracy ) and Foley & Lardner LLP, Detroit (by Norman C. Ankers ) for defendants.

Before: K. F. Kelly, P.J., and Fort Hood and Redford, JJ.

Per Curiam.

In this shareholders' dispute, defendants, Newell A. Franks II, Brian McConnell, LeeAnn McConnell, David Franks, Lawrence Franks, and Burr Oak Tool, Inc., appeal by right the trial court's order dismissing certain claims, which was entered following an earlier order granting summary disposition in favor of plaintiffs—Jeffrey Franks, the Franks Family Trust,¹ and Willis Franks. Defendants also challenge the trial court's order compelling Burr Oak to purchase plaintiffs' shares in Burr Oak. We reverse and remand for proceedings consistent with this opinion.

I. BASIC FACTS

The late Newell A. Franks founded Burr Oak in 1944. Burr Oak manufactures and sells machine tools in the heat-transfer industry. It is located in Sturgis, Michigan. The parties to this case are all related to Newell A. Franks in some way. Newell A. Franks was the father of defendant Lawrence Franks, former plaintiff Richard Franks, and Tom Franks, who was deceased by the time of this litigation. Lawrence Franks is the father of defendant Newell A. Franks II, defendant David Franks, and defendant LeeAnn McConnell. LeeAnn McConnell is married to defendant, Brian McConnell. Tom Franks was the father of plaintiffs Jeffrey Franks and Willis Franks.

Each individual defendant owns voting shares—Class A shares—of Burr Oak or has an active role in the management of the corporation, as noted by Burr Oak's then accountant, Bruce Gosling. Newell A. Franks II is the corporation's chief executive officer and the chair of the board of directors. Plaintiffs each own Class B or Class C shares in the corporation, which are nonvoting shares. Class B shares do not get dividends, but Class B shares can be converted into Class C shares, which do get dividends. Plaintiffs have no role in the management of the corporation.

Historically, Burr Oak distributed dividends to its shareholders: Burr Oak issued dividends every year from 1950 to 2004 with the exception of five years. In 2001, for example, Burr Oak distributed $23 per share to holders of Class A stock and $45 per share to holders of Class C stock. Burr Oak paid out about $2.2 million to shareholders in 2002, and paid out $2,288,000 in 2003. It distributed another $2.2 million to shareholders in 2004. However, Burr Oak ceased paying dividends after the death of Newell A. Franks in 2007.

Newell A. Franks II testified that Burr Oak stopped paying dividends because the company incurred a "tremendous outflow of cash" related to his grandfather's estate. He stated that the company had no formal policy for determining when to make a dividend distribution. Previously, his grandfather would just make the decision and it would be carried out.

Newell A. Franks II agreed that he had Gosling calculate the value of Burr Oak in 2012 in anticipation of a stock buyback. He agreed that Gosling's report, which was dated May 21, 2012, valued the company at $46,125,355, or at approximately $598 per share for the 77,043 shares of outstanding stock. Gosling testified that Newell A. Franks II asked him to prepare the valuation to help with a proposed buyout of the "minority shareholders." Newell A. Franks II stated that Burr Oak had more than $20 million in cash in May 2012. He indicated that it was not all available for the payment of dividends but agreed that some could have been used to pay dividends. He also testified that Burr Oak loaned $1 million to Sturgis Bank in 2012, and he conceded that David Franks served on the board of directors for the bank. David Franks testified that he was a voting shareholder of the bank.

Six months after Gosling's valuation, defendants had Burr Oak offer to purchase plaintiffs' shares for $62 per share. Newell A. Franks II conceded that there was no valuation to support that offer. He further acknowledged that Gosling wrote him and stated that his offer was "a good plan" because the nonvoting members were astute enough to realize that their shares had no value unless a different buyer were to offer them more. Gosling said that he made that statement to Newell A. Franks II because, "if no dividends are being paid and there are no redemptions being made, then nobody else is going to buy the stock." He explained that Burr Oak was probably the only market for the shares and that if one cannot convert the stock certificate into cash in some way, it has no value. David Franks similarly testified that he knew that the $62 offer did not have any support, but he agreed to the offer being made with the understanding that it would get the conversation started. He also testified that he did not expect anyone to accept that offer. Newell A. Franks II admitted that no one accepted the offer of $62 per share. He also admitted that there was no valuation to support it. He opined, however, that $62 per share was a fair return given that plaintiffs had paid zero dollars for their shares.

E-mail communications between David Franks and Brian McConnell suggested that the $62 per share offer to the "outside stock holders" was not made in good faith. David Franks wrote that the justification for the offer that Brian McConnell proposed to provide to Jeffrey Franks after Jeffrey Franks questioned the basis of the offer should not mention a related company—Oak Press Solutions, Inc.—because they had taken measures to ensure that that entity paid a fair price and he did not want to "plant a bug" about that company, which itself did not have the same "ownership concerns." Notably, plaintiffs had alleged that defendants caused Burr Oak to conduct business through related entities such as Oak Press Solutions to receive undisclosed distributions. Newell A. Franks II also admitted that his grandfather had in the past paid dividends of $62 per share in a single year. At a February 2013 meeting of the board of directors, the directors agreed to offer plaintiffs $141.26 per share. In September 2013, Burr Oak offered to buy shares at $248 per share. Plaintiffs did not, however, accept any of these offers.

In September 2013, Jeffrey Franks, Richard Franks, and Willis Franks sued defendants. They alleged that Lawrence Franks, David Franks, Newell A. Franks II, Brian McConnell, and LeeAnn McConnell used their control of Burr Oak to benefit themselves and their families at the expense of the minority shareholders. They asserted that the identified conduct amounted to "illegal, fraudulent, or willfully unfair and oppressive conduct" in violation of MCL 450.1489. They asked the trial court to remedy the oppression by, among other possible remedies, ordering defendants to purchase plaintiffs' shares at fair value. They also alleged a claim of breach of fiduciary duty and a claim for an accounting. Plaintiffs filed an amended complaint in October 2013. They alleged seven claims in the amended complaint: shareholder oppression under MCL 450.1489, breach of fiduciary duties, accounting, fraud, constructive fraud, breach of contract, and aiding and abetting the scheme to deprive plaintiffs of their interests as shareholders.

On June 16, 2014, plaintiffs filed a motion with the trial court asking it to order Burr Oak to issue a dividend. In that same month, defendants moved for summary disposition of plaintiffs' claims under MCR 2.116(C)(8) and (C)(10). Defendants argued that the trial court had to dismiss the shareholder-oppression claim because the conduct at issue did not establish a question of fact as to whether there was shareholder oppression. Specifically, they maintained that the failure to purchase stock was not by itself oppressive conduct and that, similarly, an offer to purchase stock at a particular price was also not oppressive. Moreover, they stated, defendants eventually offered to purchase plaintiffs' shares at $248 per share, which was the same price earlier offered to Lawrence Franks for his shares. Finally, they argued and presented evidence that the board of directors elected not to issue dividends for legitimate business reasons, which were protected under the business-judgment rule. Namely, they maintained that Burr Oak had to retain its profits for capital improvements, to retire debt, and to possibly redeem stock. Defendants relied, in part, on Brian McConnell's affidavit. Brian McConnell averred that he was Burr Oak's chief operating officer and stated that Burr Oak had to pay out more than $15 million from 2007 to 2012 to cover obligations under Newell A. Franks's estate plan. He also stated that the board of directors felt that Burr Oak needed to establish an ambitious expansion plan to remain competitive. Defendants additionally argued that the failure to pay dividends affected all the shareholders equally and that it therefore could not be oppressive to plaintiffs. In short, they maintained that there was no evidence that the board's exercise of business judgment was feigned or a mere subterfuge. As pertinent to this appeal, defendants also argued that plaintiffs failed to state a claim against LeeAnn McConnell because she was not a director of Burr Oak and did not participate in any of the decisions at issue.

On June 30, 2014, plaintiffs moved for partial summary disposition on their claim of shareholder oppression....