J Bar H, Inc. v. Johnson, 90-253

• Decision Date: 19 December 1991
• Docket Number: No. 90-253,90-253
• Citation: 822 P.2d 849
• Parties: J BAR H, INC., a Wyoming Corporation, and Donald K. Harger and Irene F. Harger, Derivatively on Behalf of J Bar H, a Wyoming Corporation, Appellant (Plaintiff), v. Joanna JOHNSON, Appellee (Defendant).
• Court: Wyoming Supreme Court

Page 849

822 P.2d 849

J BAR H, INC., a Wyoming Corporation, and Donald K. Harger and Irene F. Harger, Derivatively on Behalf of J Bar H, a Wyoming Corporation, Appellant (Plaintiff), v. Joanna JOHNSON, Appellee (Defendant).

No. 90-253.

Supreme Court of Wyoming.

Dec. 19, 1991.

Bret F. King of King & King, Jackson, and Kenneth M. McLaughlin, argued, Student Intern, for appellant.

Juline Christofferson, argued, Jackson, for appellee.

Before URBIGKIT, C.J., CARDINE and MACY, JJ., and SPANGLER and TAYLOR, District Judges.

CARDINE, Justice.

This case presents a textbook example of oppression and deadlock in a small, closely-held corporation. The trial court ordered the corporation dissolved and a receiver appointed. It found that money loaned to the corporation by appellants was not a valid debt of the corporation. It also refused to order relief in the corporation's derivative action against appellee for starting a competing business.

We affirm the trial court's order. Since some of the issues in this case have not yet been determined by the trial court, we consider only the issues presented for review and remand for further proceedings.

Appellants phrase the issues on appeal as follows:

"I. Whether the trial court erred in granting appellee's motion to amend the pleadings to conform to the evidence?

"II. Whether the trial court erred in finding that certain money loaned to the corporation by appellants Donald and Irene Harger is not a valid debt of the corporation?

"III. Whether the trial court erred in failing to grant appellants' motion for summary judgment?

"IV. Whether the trial court erred in failing to award damages to the appellants?"

Appellee states similar issues:

"I. Whether the trial court abused its discretion in granting appellee's motion to amend the pleadings to conform to the evidence?

"II. Whether the trial court erred in finding that an unauthorized and unratified promissory note signed by Donald K. Harger in behalf of the corporation, to himself and Irene Frances Harger, is not a valid debt of the corporation.

"III. Whether the trial court erred in failing to grant appellants' motion for summary judgment.

"IV. Whether the trial court erred in finding that a fiduciary duty was owed to the corporation by appellee, and failing to award damages to the appellants."

Appellee Joanna Johnson created J Bar M, a game processing business, in 1976. J Bar M was formed as a sole proprietorship. Later, Johnson sold J Bar M to appellant Donald Harger and a partner. It went bankrupt. Donald Harger then persuaded Johnson to associate in the formation of J Bar H to purchase J Bar M's assets at the foreclosure sale.

Appellants Donald K. Harger and Irene F. Harger formed J Bar H on November 18, 1983. The articles of incorporation made the Hargers its sole directors. At the organizational meeting, the corporation sold and transferred to the Hargers all 2,000 of its authorized shares of stock.

At the first meeting of shareholders, the Hargers' initial stock certificate was canceled and Joanna Johnson and the Hargers were each issued half (1,000 shares) of J Bar H. The articles of incorporation were not amended, however. The Hargers and Ms. Johnson executed a shareholders' agreement which made Donald Harger president and treasurer of J Bar H and Joanna Johnson its vice president and secretary. The corporate bylaws provided that the president of the corporation would be its chief executive officer.

The shareholders' agreement allowed Harger and Johnson to hold their offices until the shareholders unanimously agreed to their successors. In the agreement, Mr. and Mrs. Harger were again named directors of the corporation, and Ms. Johnson was added as a third director. Ms. Johnson was also given the right to name a fourth director who would serve so long as she was a shareholder.

The shareholders' agreement also apportioned managerial duties between Mr. Harger and Ms. Johnson. The two had very different backgrounds and experience. Mr. Harger had a master's degree in business administration and had been involved in management of several multi-million dollar corporations. Ms. Johnson had experience in game processing but had never previously served on a corporate board. The agreement provided that Harger and Johnson were to co-manage the corporation during its first two years of operation. Each would receive a salary for doing so. It set forth with some specificity the managerial duties of each party. After the end of the two-year period, each party was free to continue employment with the corporation but was not obligated to do so. The agreement also contained a restriction on transfer of shares and a clause providing for arbitration in the event of deadlock.

For the first two years, Don Harger and Joanna Johnson co-managed the business as provided in the shareholders' agreement. However, J Bar H had financial troubles from the very beginning. It is clear from the record on appeal that these troubles contributed to the conflict which soon arose between Johnson and the Hargers.

Between 1984 and 1988, J Bar H held no formal directors' or shareholders' meetings, nor were any consent minutes signed and filed. By the end of the 1986 game season, Donald Harger began to squeeze Johnson out of management. He exercised increasing, unilateral control of the day-to-day business of J Bar H. In the face of multiplied managerial conflicts, Harger sent Johnson a letter in June 1987 in which he informed her that she was no longer an employee of J Bar H and as a shareholder she had no active role or operational responsibilities within the corporation. Mr. Harger claimed he had the authority to make this decision inherent in his position as president and chief executive officer of J Bar H.

In Spring or early Summer of 1987, Harger changed the locks on the business and instructed employees not to allow Johnson to enter the business. Harger stated at trial that he locked Johnson out because Johnson was writing checks and giving herself distributions from the corporation at a time when it was facing foreclosure. The locks to the business were changed two more times, first by Johnson and then by Harger.

At the beginning of the Fall, 1987 game season, when Ms. Johnson arrived to begin work with her usual crew of meatcutters, Harger's new manager barred them from entry. A confrontation ensued, and after Mr. Harger arrived, he called the police. Subsequently, on September 17, 1987, Harger applied for a temporary restraining order to prevent Johnson from interfering with the business. Johnson then filed suit against Harger in district court. This suit was dismissed in December 1987, and the parties were ordered to undergo binding arbitration pursuant to the terms of the shareholders' agreement.

The Board of Arbitrators of Teton County found that Don Harger should manage the day-to-day affairs of the corporation. The Board recommended that "the corporation be liquidated or the parties work together to turn the corporation around to make it profitable, under Mr. Harger's management."

Mr. Harger apparently took the Board's decision as a mandate to shut Ms. Johnson completely out of the management of the corporation. He instructed Johnson that she was to have no further involvement whatsoever in the operation of the company. Without consulting Ms. Johnson, he designated Ronald Woodward "vice president" of the corporation. Harger removed Johnson's name from the corporation's bank signature card and substituted that of Woodward, as "Vice President and Asst. General Manager" of J Bar H.

On May 25, 1988, the Hargers executed a corporate resolution allowing the corporation to borrow money from themselves. The Hargers did not tell Ms. Johnson about this resolution. Don Harger then borrowed $290,000.00 on his personal assets and loaned the corporation $247,402.07. He executed, as president of J Bar H, a promissory note to the himself and Irene Harger from the corporation in that amount plus twelve percent interest.

In May 1988, Donald Harger listed J Bar H for sale with Real Estate of Jackson Hole. The listing contract showed Mr Harger as the owner of record of the corporation. Mr. Harger also wrote a letter to Douglas Herrick, the president of Real Estate of Jackson Hole, in which Harger stated: "The Company is now available for sale as a result [of] a favorable Arbitration Hearing assigning control to me."

Ms. Johnson, frustrated at her lack of control over J Bar H, set up another meat processing business under the name "Game Processing." She sent a letter soliciting business from many of the outfitters who were or had been customers of J Bar H. The corporation filed suit for damages and injunctive relief against Joanna Johnson and Wendell Campbell, one of her game processors, on September 20, 1989. Wendell Campbell was later dismissed from the suit. The Hargers later amended the complaint to allege a shareholder's derivative suit by themselves on behalf of the corporation against Joanna Johnson.

While the suit was pending, the directors of J Bar H held an annual board of directors meeting on June 4, 1990. The minutes of this meeting reveal that the corporation was deadlocked on nearly every issue of importance. The Hargers voted one way, and Joanna and her designated director, the opposite.

Trial was held on the Hargers' complaint on July 16-18, 1990. At the conclusion of both parties' cases in chief, Johnson moved to amend the pleadings to conform to the evidence. The trial court granted the motion to amend the pleadings, over appellants' objection. The Hargers then called two rebuttal witnesses. Johnson also took the stand for herself as a rebuttal witness. At the close of all the evidence, the trial court gave the parties thirty days in which one or the other could buy the other party out. The parties reached no settlement during this thirty-day period.

On September 11, 1990, the trial court announced its decision. It...