Johns v. Caldwell

• Decision Date: 18 March 1980
• Citation: Johns v. Caldwell, 601 S.W.2d 37 (Tenn. App. 1980)
• Parties: Carlos JOHNS, Plaintiff-Appellant-Cross-Appellee, v. Harold L. CALDWELL, Defendant-Appellee, and Richard T. Moore, Sr., Defendant-Appellee-Cross-Appellant.
• Court: Tennessee Court of Appeals

Page 37

601 S.W.2d 37

Carlos JOHNS, Plaintiff-Appellant-Cross-Appellee, v. Harold L. CALDWELL, Defendant-Appellee and Richard T. Moore, Sr., Defendant-Appellee-Cross-Appellant.

Court of Appeals of Tennessee, Western Section.

March 18, 1980 Certiorari Denied by Supreme Court June 23, 1980.

M. T. Weakley, Weakley & Weakley, Dyersburg, for Johns.

Joseph M. Boyd, Jr., Boyd & Boyd, Dyersburg, for Caldwell.

A. D. Walker, Jr., Walker & Walker, Dyersburg, for Moore.

EWELL, Judge.

Plaintiff, Johns, and defendant, Caldwell, in 1965 purchased from Newbern Hardware Company, Inc. (NHC) substantially all of the assets of a John Deere equipment dealership. After execution of the contract of sale but before the sale was consummated, K. E. Moore, controlling stockholder of NHC, insisted as a condition of going forward with the transaction that his son, defendant Moore, be given 10% ownership in the new business. Johns and Caldwell agreed to this condition and in view thereof elected to form a Tennessee corporation styled "Newbern Implement Company, Inc." (NIC). Initially, 1,100 shares of stock with a par value of $100.00 per share were issued to K. E. Moore (110 shares or 10%), defendant Moore (110 shares or 10%), plaintiff Johns (440 shares or 40%) and defendant Caldwell (440 shares or 40%). In May, 1965, the 110 shares of K. E. Moore were transferred to Johns (55 shares) and to Caldwell (55 shares), and thereafter the stock of NIC was owned by Johns (45%), Caldwell (45%) and Moore (10%) until 1978 when Moore agreed to sell his 10% to Caldwell for $36,000.00 in cash. Johns brought suit against Caldwell and Moore in the Circuit Court of Dyer County to prevent the transfer of stock or to require an equal division of Moore's stock between Johns and Caldwell. Judge Joe G. Riley Jr. heard the case without a jury and found for the defendants, dismissing the complaint. Plaintiff has appealed.

Judge Riley voluntarily filed in the cause below a "Memorandum of Decision" in which he succinctly sets forth his findings of fact and conclusions of law. The material facts are thoroughly reviewed and the controlling questions of law are separately addressed by Judge Riley, and to place the case in proper perspective we copy the "Memorandum of Decision" in toto:

The original Complaint in this cause prays that this Court prohibit the transfer of 110 shares of stock in Newbern Implement Company, Inc. Said complaint alleges that there was a confidential relationship between all three (3) of the parties to this suit, said parties being the stockholders of the corporation. The suit also asked the Court to declare the existence of a trust relationship between the three (3) stockholders. The essence of the Complaint is that Plaintiff Johns will suffer irreparable harm if Defendant Caldwell is allowed to purchase the stock from Defendant Moore, thereby giving Defendant Caldwell controlling interest in the corporation. Answers were filed on behalf of defendants Caldwell and Moore which deny that Plaintiff is entitled to any relief.

A Cross-Complaint has also been filed on behalf of Defendant Moore against Johns and Caldwell. Said Cross-Complaint alleges that in the event the Court prohibits the transfer of stock from Moore to Caldwell, Moore's stock would be worthless; therefore, the Cross-Complaint prays that the Court order Caldwell and Johns to purchase said stock for the sum of $55,000.00. The Cross-Defendants have denied that Cross-Plaintiff is entitled to any relief.

Although not requested by any of the parties, the Court hereby makes the following findings of fact and conclusions of law pursuant to Rule 52.01 of the Tennessee Rules of Civil Procedure.

FINDINGS OF FACT

Kirby Moore owned and operated an implement dealership for a number of years in Newbern. Harold Caldwell was an employee of this business. On January 22, 1965, Carlos Johns and Harold Caldwell entered into a contract with Kirby Moore regarding the purchase of this dealership. This contract was entered into by Johns and Caldwell as individuals. A lease was also executed simultaneously with the contract, and it also was executed by Johns and Caldwell as individuals. No corporation was in existence at this time since the charter was not issued until February 1965.

It was agreed by all parties that Defendant Richard Moore, the son of Kirby Moore, would be a part owner in the dealership. All parties agreed to and in fact did form a small business corporation whose charter was issued February 1965. The stock ownership of the newly formed corporation was as follows: Kirby Moore 10%, Richard Moore 10%, Carlos Johns 40% and Harold Caldwell 40%. The ten percent (10%) of the stock owned by Kirby Moore was security for part of the purchase price of the dealership and was later transferred by Kirby Moore equally to Caldwell and Johns upon their paying the indebtedness to Kirby Moore.

The By-Laws of the corporation specifically restricted the transfer of stock of the two (2) major shareholders, Caldwell and Johns. Said By-Laws did not expressly or impliedly restrict the transfer of stock owned by Moore. Furthermore, Caldwell and Johns entered into a Buy and Sell Agreement on July 23, 1977, relating to their 495 shares each of the stock of Newbern Implement Company, Inc. Although this document states that Richard T. Moore owns 110 shares of stock, Richard T. Moore was not a party to this agreement. Therefore, the Court finds that neither the By-Laws nor any written agreements between the parties restricted the transfer of stock owned by Richard T. Moore. The Court further finds that there was no oral agreement relating to restrictions on the sale of stock owned by Richard T. Moore.

For several years after incorporation the corporation retained its Subchapter S status and distributed dividends during the profitable years of 1966, 1968 and 1969. Johns and Caldwell then desired to terminate the Subchapter S status of the corporation; therefore, Johns sold five (5) shares of stock to his daughter for the express purpose of terminating the Subchapter S status. This stock was later re-transferred to Johns.

Moore was removed as a Director after 1969 and was replaced by Linda Davis, an employee of the business. Except for the year 1974, no dividends have been paid to stockholders since the termination of the Subchapter S status of the corporation. In 1976 bonuses in addition to regular salary were paid to Johns and Caldwell in the amount of $25,000.00 each. In 1977 bonuses in addition to salary were paid to Johns and Caldwell in the amount of $30,000.00 each. No payments were made to Moore.

In 1966 the corporation bought a certain tract of land for potential development as a commercial site. In 1976 at the direction of the Board of Directors the corporation sold this tract to Johns and Caldwell under the partnership name of J & C for the same price that the corporation paid in 1966. The partnership is presently leasing this tract and a building thereon to the corporation for $1,540.00 per month.

In May of 1978 Moore contacted Caldwell regarding the possibility of selling his stock to Caldwell. No definite price was established during this conservation. On May 19, 1978, Caldwell delivered to Moore a check in the amount of $36,000.00 and Moore signed over the stock certificates to Caldwell. Caldwell did not inform Johns about the offer of Moore until after the transaction had been completed. Johns as Secretary of the corporation then refused to make this transfer on the books of the corporation. It was at this point that suit was instituted by Johns.

The Court also finds that from the inception of the corporation until the attempted transfer of the stock from Moore to Caldwell, Caldwell and Johns had a satisfactory working relationship and had been able to handle without serious dispute the setting of salaries and bonuses for themselves as well as all other matters relating to the implement business.

Plaintiff Johns has based much of his argument upon the fact that this business has operated as a partnership for all practical purposes rather than a corporation. However, the Court finds that said business was properly organized as a corporation and has continued to operate as a corporation both in the legal and practical sense. Directors' meetings have been held, minutes have been kept, corporate tax returns have been filed and dividends have been declared. All of these activities are indicative of a corporate form of business.

CONCLUSIONS OF LAW

A. Fiduciary relationship

Plaintiff has argued that a fiduciary relationship exists among all three (3) shareholders. Giving further support to his argument, Plaintiff has insisted that the business has operated as a partnership in the practical sense rather than a corporation. Furthermore, Plaintiff relies strongly upon the argument that this is a close corporation.

There is no question but that this business has and continues to be a close corporation since (1) there are few shareholders, (2) the shares are not traded on the securities market, (3) the shareholders live in the same geographical area, and (4) most of the shareholders serve as directors, officers and employees of the business. (See O'Neal's Close Corporations, 2nd Edition, Vol. 1, Sec. 1.02 and 1.07.) However, the Court is of the opinion that just because a corporation is a close corporation as opposed to a regular corporation does not necessarily mandate a finding of a fiduciary relationship among all shareholders relating to the sale and purchase of stock.

It is clear that corporate officers occupy a fiduciary relation to the corporation. Central Bus Lines v. Hamilton National Bank, 239 S.W.2d 583 (Tenn.App.1951). It is further clear that corporate directors occupy a fiduciary relationship to the corporation. 19 C.J.S. Corporations, Sec. 761, Page 103 (1971). Therefore, close investigation is accorded a corporation's transactions with an officer or director, and...