JOHN R. BEHRMANN REVOC. TRUST v. Szaloczi, 01CA0775.

• Decision Date: 21 November 2002
• Docket Number: No. 01CA0775.,01CA0775.
• Citation: 74 P.3d 371
• Parties: JOHN R. BEHRMANN REVOCABLE TRUST, Plaintiff-Appellant, v. Eric L. SZALOCZI, Michael P. Batzer, Jay Crist, Robert S. Pfeiffer, Allan Wise, Michael Caskey, Roland DeBruyn, Jeffrey Weber, and Bruce Williams, Defendants-Appellees.
• Court: Colorado Court of Appeals

74 P.3d 371

JOHN R. BEHRMANN REVOCABLE TRUST, Plaintiff-Appellant, v. Eric L. SZALOCZI, Michael P. Batzer, Jay Crist, Robert S. Pfeiffer, Allan Wise, Michael Caskey, Roland DeBruyn, Jeffrey Weber, and Bruce Williams, Defendants-Appellees.

No. 01CA0775.

Colorado Court of Appeals, Div. II.

November 21, 2002.

Certiorari Granted July 21, 2003.

Brega & Winters, P.C., James W. Bain, Denver, Colorado, for Plaintiff-Appellant.

Holme Roberts & Owen LLP, David S. Steefel, Mark R. Gordon, Denver, Colorado, for Defendants-Appellees.

Opinion by Judge JONES.

Plaintiff, John R. Behrmann Revocable Trust, appeals the dismissal of its claims for damages against defendants, Eric L. Szaloczi, Michael P. Batzer, Jay Crist, Robert S. Pfeiffer, Allan Wise, Michael Caskey, Roland DeBruyn, Jeffrey Weber, and Bruce Williams, each a shareholder and a director or officer in Preston Reynolds and Company, Inc. (PRC). We reverse and remand.

The trust and defendants are the sole shareholders in PRC, a closely held corporation. Defendants controlled the PRC board of directors, of which John R. Behrmann was a member. In November 1999, defendants voted to remove Behrmann from the board, and he became the sole outside minority shareholder.

On April 6, 2000, PRC entered into an asset purchase to sell substantially all of its assets to two companies, MDU Resources Group, Inc. and WBI Production, Inc. WBI agreed to pay PRC $75 million, with the potential for an additional payment of $25 million upon the exercise of an option by PRC to repurchase an option from WBI. In addition, the agreement provided for stock options, a future distribution of the repurchase option funds of $25 million, employment agreements, $7.7 million in bonuses to board members and employees, and tax benefits to the officers of PRC. The sale closed on April 17, 2000.

The trust asserted that the terms of the agreement worked to its detriment as a nonofficer, outside shareholder.

The trust dissented to the sale, and subsequently the trust filed this action alleging that defendants had breached their fiduciary duties to the trust by: (1) granting themselves stock options below market value, cashing out some stock options early, and extending other stock options beyond their expiration dates; (2) negotiating personal employment contracts for themselves in connection with PRC's contract to sell substantially all its assets to WBI; (3) arranging to take substantially more from the sale than the trust and paying themselves as officers rather than as shareholders; (4) arranging extraordinary compensation for themselves in the year preceding the sale and causing a loss of tax deduction to the trust; (5) issuing an inadequate proxy notice with respect to the sale; and (6) conspiring to accomplish unlawful goals in the sale of the company assets. The trust further alleged that defendant Crist had breached his fiduciary duty to the trust because Crist was, putatively, the sole disinterested board member concerning the asset sale. The trust also asserted that it suffered damages from the respective actions of each individual defendant.

Two days after the trust filed this action, it tendered its shares to the company and exercised its statutory appraisal rights, under § 7-113-101(4), C.R.S.2002, which entitled it to the fair value of its shares immediately before the sale. Another action is currently pending to consider the proper value of the trust's shares.

Defendants moved to dismiss this tort action. Upon consideration of the briefs, the trial court granted their motion and dismissed the action on grounds that the trust's sole remedy is provided by the appraisal statute, § 7-113-101, et seq., C.R.S.2002. This appeal followed.

The trust contends that the trial court erred when it concluded that appraisal is the trust's exclusive remedy. We agree.

We review de novo a trial court's determination on a motion to dismiss, and we accept as true all averments of material fact contained in the complaint. Scott Sys. v. Scott, 996 P.2d 775 (Colo.App.2000). When ruling on a motion to dismiss a complaint, the court must view the allegations of the complaint in a light most favorable to the plaintiff. Halverson v. Pikes Peak Family Counseling & Mental Health Ctr., Inc., 795 P.2d 1352 (Colo.App.1990). If a plaintiff offers evidence in support of a legally recognized claim for relief, a motion to dismiss must be denied. Davidson v. Dill, 180 Colo. 123, 503 P.2d 157 (1972). Generally, motions to dismiss are not viewed with favor, and are rarely to be granted. See Dunlap v. Colo. Springs Cablevision, Inc., 829 P.2d 1286 (Colo.1992)

.

The trust argues that it has an action, separate from the share valuation accounting, against defendants for conduct unrelated to the sale of company assets. Although the trust may not pursue a separate action for certain types of mismanagement, we conclude it may pursue a claim for constructive fraud.

I.

The Colorado Dissenters' Rights Act provides, in relevant part:

A shareholder who demands payment in accordance with subsection (1) of this section retains all rights of a shareholder, except the right to transfer the shares, until the effective date of the proposed corporate action giving rise to the shareholder's exercise of dissenters' rights and has only the right to receive payment for the shares after the effective date of such corporate action.

Section 7-113-204(2), C.R.S.2002.

In Colorado, claims of breach of fiduciary duty through mismanagement, self-dealing, and secret profits traditionally have been considered corporation claims, "whether raised by the corporation itself or by the stockholders in a derivative suit." Ireland v. Wynkoop, 36 Colo.App. 205, 217, 539 P.2d 1349, 1357 (1975). Additionally, the general trend in Colorado has been that claims of waste, mismanagement of assets, or looting must be pursued in a shareholder's derivative suit. River Mgmt. Corp. v. Lodge Props. Inc., 829 P.2d 398, 404 (Colo.App.1991); see also Breniman v. Agric. Consultants, Inc., 829 P.2d 493 (Colo.App.1992)

(concluding trial court correctly dismissed plaintiff's personal claims because plaintiff was no longer stockholder and lacked standing to maintain derivative action).

A plaintiff must be a shareholder at the time of the action in question and must continue to be a shareholder throughout the derivative litigation. See Breniman v. Agric. Consultants, Inc., supra.

Here, the trust surrendered its shares in PRC two days after it filed this lawsuit and, thus, lost its right to sue for breach of fiduciary duty through mismanagement of assets, self-dealing, waste, or looting.

II.

However, the trust asserts that, under the circumstances here, § 7-113-102(4) provides an exception to the exclusivity of the dissenters' rights remedy where, as here, the directors' actions are "unlawful or fraudulent with respect to the shareholder or the corporation." We agree.

"A stockholder may maintain a personal action in his capacity as a stockholder only if the actions of the third party that injure the corporation result from a violation of a duty owed to him as a stockholder and... cause him injury as a stockholder, unique to himself and not suffered by the other stockholders." Nicholson v. Ash, 800 P.2d 1352, 1357 (Colo.App.1990)(citing Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo.App. 344, 569 P.2d 875 (1977)).

The court's purpose in construing a statute is to give effect to the intent of the General Assembly. Martin v. People, 27 P.3d 846 (Colo.2001). When the language of a statute is unambiguous, we presume it expresses the intent of the General Assembly, and we will apply it as written, without resort to other interpretive rules of construction. People v. Shinaut, 940 P.2d 380 (Colo.1997).

Here, we conclude that the language of the statute is unambiguous and, therefore, we assign to the words their plain meanings.

Section 7-113-102(4) states:

A shareholder entitled to dissent and obtain payment for the shareholder's shares under this article may not challenge the corporate action creating such entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation.

(Emphasis added.) There are no reported appellate decisions in Colorado construing this section. However, we agree with the trust that this section applies to its claim because fraudulent actions in the nature of constructive fraud are within the exception. See Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., supra, 39 Colo.App. at 351, 569 P.2d at 881

(holding breach of fiduciary duty by a director constitutes constructive fraud, and, therefore, affected shareholder was entitled to dissenters' rights and to challenge the corporate action creating entitlement to dissenters' rights).

Constructive fraud is defined as a breach of duty that the law declares fraudulent because of its tendency to deceive, to violate confidence, or to injure public interests. "`Neither actual dishonesty nor intent to deceive is an essential element of constructive fraud.' Such fraud often arises where a special, confidential or fiduciary relationship exists, which affords the power and means of one to take undue advantage...