Golden v. Oahe Enterprises, Inc.

• Decision Date: 23 July 1980
• Docket Number: No. 12583,12583
• Citation: 295 N.W.2d 160
• Parties: Warren GOLDEN, Plaintiff and Appellant, v. OAHE ENTERPRISES, INC., a South Dakota Corporation, Donald F. Emmick, Individually and as a Director and President of Oahe Enterprises, Inc.; and, Robert Emmick, Individually and as a Director and Secretary of OaheEnterprises, Inc., Defendantsand Appellees.
• Court: South Dakota Supreme Court

Page 160

295 N.W.2d 160

Warren GOLDEN, Plaintiff and Appellant, v. OAHE ENTERPRISES, INC., a South Dakota Corporation, Donald F. Emmick, Individually and as a Director and President of Oahe Enterprises, Inc.; and, Robert Emmick, Individually and as a Director and Secretary of OaheEnterprises, Inc. Defendantsand Appellees.

No. 12583.

Supreme Court of South Dakota.

July 23, 1980.

R. G. Schmidt of Schmidt, Schroyer & Colwill, P. C., Pierre, for plaintiff and appellant.

Glen H. Johnson of Banks & Johnson, Rapid City, for defendants and appellees.

WOLLMAN, Chief Justice.

FACTS

This is the fourth appeal to this Court from litigation between these parties concerning the assets of Oahe Enterprises, Inc. (Oahe). In Oahe Enterprises, Inc. v. Golden, 88 S.D. 296, 218 N.W.2d 485 (1974), the appeal was dismissed because we concluded that the order appealed from was not appealable. We indicated in that case, however, that Warren Golden (Golden) was entitled to receive 338.446 shares in Oahe. In Golden v. Oahe Enterprises, Inc., 90 S.D. 263, 240 N.W.2d 102 (1976), two appeals were combined and several issues were addressed at length. In that opinion, we ordered that Oahe be dissolved and that an accounting of the corporation's financial affairs be made to Golden with a pro rata distribution of the proceeds of the corporation to be made between Golden and the sole remaining stockholder, Donald Emmick (Emmick). The remand also required the trial court to examine the merits of Golden's allegations of wrongful appropriation of the corporate assets by Emmick and to examine the issues of fraud and the extent of actual and exemplary damages resulting therefrom. The present appeal is brought by Golden, alleging, among other things, that the trial court applied the wrong standard of proof concerning the issue of fraud and erred in its treatment of certain loans made for the purchase of the corporate assets, and finally, that the trial court failed to award the proper attorney fees. We reverse and remand.

Because the prior opinions of this Court dealt with only part of the factual history involved and because heretofore the corporation was an ongoing entity producing constantly changing relationships, the labyrinthian facts of this dispute that has continued now in excess of twelve years have never been fully set forth.

Emmick is the major figure in the story of Oahe. In years past, Emmick has been involved in the sale of industrial chemicals, the promotion of nursing homes, and the management of various farming activities. Emmick approached one J. B. Morris (now deceased) with a plan whereby Morris' Sully County, South Dakota, ranch would be incorporated and through Emmick's managerial skills made to show a profit. At approximately the same time, Emmick approached Golden, who was then operating the Silver Spur Bar in Ft. Pierre, and proposed that Golden contribute some farm machinery and livestock to Oahe. Golden was not, however, present on October 26, 1966, when Oahe was incorporated at a meeting in the office of George Qualley, Emmick's lawyer, in Sioux City, Iowa.

At this meeting, it was concluded that Oahe shares would be given a $50 par value. Officers of the corporation were elected: Chairman and Secretary-Treasurer, J. B. Morris; President, Emmick; and Vice-President, Milton Morris (J. B. Morris' son). An agreement was signed whereby J. B. and Mary Morris transferred their ranch to Oahe Enterprises. It was concluded that the Morris ranch was worth $168,000.00. Of this amount, Morris' equity was determined to be $120,000.00. As his contribution, Emmick transferred 6,315 shares of Colonial Manors, Inc., stock (CM stock) to Oahe.

Colonial Manors, Inc., is an Iowa corporation that is involved in the promotion and management of nursing homes throughout the Midwest. There is serious disagreement concerning the value this stock had at the time Emmick exchanged it for Oahe stock. Emmick represented to the Morrises that the stock was worth $19 per share. At the March 1966 meeting of the CM Corporation, the board of directors set the value of CM stock for internal stock-option purposes at $19 per share. This figure represented $1 for each nursing home the CM Corporation was involved with. At the September 1966 meeting, the value of the CM stock was reduced by the board of directors to $9.50 per share. Emmick knew of the reduction in value of the CM stock prior to the October 26, 1966, meeting at which Oahe was incorporated. There is, however, no evidence that would suggest that this knowledge was disclosed to the Morrises.

Oahe then commenced ranching operations under Emmick's management. In October 1966, ¹ Golden agreed to transfer various items of equipment to Oahe in exchange for shares in the corporation. Golden was elected secretary-treasurer of the corporation and together with his wife attempted to do the bookkeeping for Oahe. At one point, Emmick asked the Goldens to produce a balance sheet that he might present to a local lending institution in order to procure loans for the corporation. The Goldens refused to produce this balance sheet unless they were allowed to examine all of the books of Oahe Corporation. Emmick refused this request. This long series of lawsuits then began.

By 1970, Emmick and a Mr. Danbury held between them all of the shares of Oahe, except Golden's shares. They did not consider Golden to be a shareholder. Golden was excluded from all meetings of Oahe and was not informed of the final transaction in which the assets of Oahe were transferred to one Charles Cannon III (Cannon).

Cannon was in the process of establishing a large ranch in South Dakota. During this process, he acquired substantial holdings lying on both sides of the Oahe ranch. Originally, Emmick and Cannon discussed the possibility of merging the Oahe ranch with the Cannon holdings to establish one corporation, of which Emmick would be part owner. For tax reasons, however, Cannon needed to make a large purchase. Accordingly, he set out to buy the Oahe ranch.

It was arranged that Emmick would acquire all the outstanding shares of Oahe and would then transfer the assets of the corporation which consisted primarily of the ranch to Cannon for approximately $770,000. Cannon advanced Emmick $150,000 of the purchase price, in part to allow Emmick to purchase Danbury's 2,366 shares of Oahe. Emmick also used part of the loan proceeds from Cannon to pay off various debts of the corporation, in addition to making a substantial down payment on the Danbury shares. These shares were then placed in escrow and the voting rights immediately transferred to Emmick. The result of this was to make Emmick the sole owner of Oahe, except for Golden's 338.446 shares. The anticipated sale then occurred, and Cannon paid the purchase price to Oahe. Included within the Cannon payment was an assignment to Oahe of the $150,000 note given by Emmick to Cannon.

The trial court found that the Cannon-Emmick advance was a personal loan to Emmick and that upon final dissolution of the corporation Emmick would owe the $150,000 to Oahe. The trial court did not, however, allow any adjustment for the more than $50,000 of the loan that Emmick used to pay off corporation debts.

The trial court found that upon final dissolution there were 5,070.446 shares of Oahe outstanding and that Oahe's total net worth available for distribution to Emmick and Golden was.$693,354.44. The court found that Golden owned 338.446 shares of Oahe. Pro rata distribution of the Oahe assets would give Golden 6.675 percent, or $46,281.41, and Emmick 93.325 percent, or $647,073.03. This result occurs because the trial court granted Emmick the option of retaining in his own name the 2,366 shares purchased from Danbury and owing the corporation $132,675 as the balance of the purchase price on the shares, or considering those shares to be corporate shares and canceling them.

I Valuation of the CM Stock Exchanged for Oahe Stock

As we interpret it, Golden's real complaint is that Emmick was allowed to use as the value of his CM stock a value arbitrarily affixed by the CM board of directors for a strictly internal purpose that of raising badly needed funds for CM by offering stock options at a desperate juncture in its corporate life. This value admittedly bore no relationship to the book value of CM stock, which the trial court found to be forty-seven cents per share. Emmick admitted that he used for his valuation of CM stock the internal stock option price set by the CM board of directors. Yet when that same board reduced the CM stock option price to $9.50 per share on September 16, 1966, a fact Emmick knew, this reduction was not reflected in the value Emmick set on the CM shares transferred into Oahe a month and a half later.

SDCL 47-3-29 provides: "In the absence of fraud in the transaction, the judgment of the board of directors or the shareholders, as the case may be, as to the value of the consideration received for shares shall be conclusive." Prior to the enactment of SDCL 47-3-29, the comparable section of our Code read:

When property is taken by the corporation in consideration for capital stock of the corporation, the judgment of the board of directors, made in good faith, and entered in the minutes of the corporation, shall be conclusive as to the value of such property.

SDC 1960 Supp., § 11.0301. This provision was carried over from R.C. 1919 § 8775, alluded to in Ipswich Printing Co. v. Engler, 63 S.D. 396, 259 N.W. 497 (1935). The change in 1965 from the good faith test to the absence of fraud test is derived from Section 19 of the Model Business Corporation Act, drafted by the American Bar Association's Committee on Corporate Laws. The committee's comment following this section states:

The third paragraph of section 19, dealing with valuation, adopts the "absence of fraud" rule. . . . A court might well reach the same result under the "absence of fraud" rule as under the ...