Johnson v. Booth

• Decision Date: 29 April 2008
• Docket Number: No. DA 07-0268.,DA 07-0268.
• Citation: 2008 MT 155,184 P.3d 289,343 Mont. 268
• Parties: Bruce A. JOHNSON, Plaintiff and Appellee, v. Henry BOOTH, Defendant and Appellant.
• Court: Montana Supreme Court

184 P.3d 289

2008 MT 155

343 Mont. 268

Bruce A. JOHNSON, Plaintiff and Appellee, v. Henry BOOTH, Defendant and Appellant.

No. DA 07-0268.

Supreme Court of Montana.

Submitted on Briefs March 5, 2008.

Decided April 29, 2008.

For Appellant: Steven T. Potts, Thompson, Potts & Donovan, P.C., Great Falls, Montana.

For Appellee: Sara R. Sexe, Marra, Sexe, Evenson & Bell, P.C., Great Falls, Montana.

Justice W. WILLIAM LEAPHARTdelivered the Opinion of the Court.

¶ 1 This case concerns a dispute between the co-owners of two business entities— Hank's Fire Service, Inc. (hereinafter "Hank's") and Arcane Worldwide Racing, LLC. (hereinafter "Arcane"). Henry Booth appeals from an order of the District Court for the Eighth Judicial District, Cascade County, redesignating a custodian as a receiver with orders to wind up and liquidate Hank's and Arcane. Booth also appeals from a separate District Court order imposing discovery sanctions for Booth's failure to comply with an order compelling responses to discovery requests. We dismiss with respect to both claims.

¶ 2 We restate the issues on appeal as follows:

1. Did the District Court abuse its discretion when it redesignated the custodian as a receiver, pursuant to § 35-1-941(4), MCA?

2. Did the District Court err when it failed to hold a hearing prior to redesignating the custodian as a receiver?

3. Did the District Court err by imposing sanctions for failure to comply with an order compelling Booth to respond to discovery requests?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 3 Johnson and Booth are equal owners of both Hank's and Arcane. Hank's provided fire extinguishers, fire alarms, and fire sprinkler systems to various businesses. Johnson and Booth filed articles of incorporation for Hank's on April 22, 1993. The articles provided that Booth and Johnson would serve as the two directors and that Booth would be the registered agent. Arcane's primary business focus was on motorcycles. Johnson and Booth filed the articles of organization for Arcane on September 28, 2004. Booth's residence served as the principal place of business for both entities; however, after this action commenced, Hank's relocated to another place of business.

¶ 4 On July 1, 2005, Johnson filed a complaint in which he made numerous allegations, including that Booth was attempting to "dominate and control the business and affairs of [Hank's] at the exclusion and to the detriment of Bruce Johnson," that Booth unilaterally precluded Johnson from Hank's place of operation by means of police intervention, that Booth diverted a substantial amount of funds from Hank's for Arcane or Booth's personal use without Johnson's consent, and that Booth "had usurped complete control of corporate holdings" depriving Johnson from investment income and participation in the management of Hank's. Johnson's requested relief included: (1) that Booth be removed as both president and treasurer of Hank's and as managing member of Arcane; (2) an accounting of all business records of both businesses; (3) that the District Court appoint a custodian and/or receiver to manage the business and affairs of Hank's; (4) damages and statutory interest; and (5) either a distribution of, and/or purchase of the shareholders' interest in Hank's and the members' capital investment and interest in Arcane or that both businesses be dissolved with the proceeds to be distributed according to the parties' respective interests.

¶ 5 Concurrent with the filing of his complaint, Johnson filed a Motion for Temporary Restraining Order and Preliminary Injunction, Request for Receiver or Custodian, Brief in Support and Request for Hearing. Johnson requested that the District Court enjoin Booth from interfering with the operation of Hank's and Arcane or from transacting business without an independent receiver's oversight. Johnson also requested that the court prevent Booth from transferring or disposing of any property of either company without Johnson's consent or a court order. The District Court issued the temporary restraining order that same day.

¶ 6 The parties entered into a stipulation on July 12, 2005, in which they agreed to several of the provisions found in the temporary restraining order, including that neither party would: (1) interfere with the reasonable and proper exercise of the other's activities in relation to Hank's or Arcane, (2) transfer property without the other's consent or a court order, (3) cause either business to spend more than $500 without providing written notice to the other party, or (4) disparage the other or imply that the other is without business authority. Johnson and Booth also agreed that both parties would have full access to all business, organizational, and financial records of Hank's and Arcane, and that until further court order, it would not be necessary for either entity to appear or otherwise defend itself. Upon reviewing the stipulation, the District Court ordered that the parties be bound by its terms until the Hank's and Arcane entities and/or the ownership interests separated.

¶ 7 Only a little over three months after Johnson and Booth signed the stipulation, Johnson filed a Motion for Order to Show Cause and Renewed Motion for Temporary Restraining Order and Request for Receiver or Custodian. Johnson alleged that in the time since the parties signed the stipulation, Booth violated numerous provisions of the stipulated order, including continuing to operate the businesses as if they were Booth's sole proprietorships and unilaterally deciding to cease Arcane's operations (the parties later agreed to sell Arcane's motorcycles and other equipment in order to pay the company's debts). After reviewing Johnson's motion, the District Court issued an order to show cause and set the matter for a hearing.

¶ 8 The District Court held three hearings on Johnson's renewed motion. Both Johnson and Booth then filed proposed findings of fact and conclusions of law, as requested by the court. In its subsequent order, the District Court refused to find Booth in contempt of court due to lack of personal service of the order to show cause. Similarly, the court also found that it could not appoint a receiver or a conservator due to lack of personal jurisdiction over Hank's or Arcane because Johnson had not served either entity through its registered agent. However, the court did find that Booth had violated a number of the terms of the stipulation and ordered the parties to again abide by its terms. The court also concluded "[a]lthough it is abundantly clear that the parties can no longer successfully manage the corporation together, and that it would be in the best interest of the corporation to consider dissolving the corporation and/or appointing a receiver/custodian, for the reasons set forth herein, this Court does not have jurisdiction over the businesses to issue such an order."

¶ 9 In response to the District Court's order, Johnson notified the court that he served Booth as the registered agent for Hank's and Arcane. Johnson later provided an affidavit of service to the court demonstrating that service was accomplished on May 4, 2006. On subsequent motion by Johnson, the court entered the defaults of Hank's and Arcane after both entities failed to appear.¹ Johnson then filed a Renewed Request for Custodian. The District Court held a hearing on Johnson's renewed request and heard arguments from both parties. In its subsequent order, the District Court determined that Hank's and Arcane needed an independent custodian. Notwithstanding Booth's arguments that a custodian was unnecessary as Hank's already had a manager in place, the court concluded that a custodian was necessary as "that manager is subject to the directives of each party and often receives completely conflicting instructions from Booth and Johnson."

¶ 10 On January 29, 2007, Johnson filed a Motion for Appointment of New Custodian and for Definitive Instructions to Custodian. In addition to addressing the issue of the appointment of a second custodian (the first custodian appointed by the District Court resigned earlier that month), Johnson also voiced his concerns about the role of the custodian. Johnson stated:

[Hank's] and [Arcane] have not answered the Complaint, and have been defaulted. The Complaint included a request for dissolution of both [Hank's] and [Arcane] to which neither entity has provided a defense. Therefore, these entities should be dissolved and the assets and liabilities of the businesses should be wound up and dealt with by the custodian in this matter.

Johnson requested that the court appoint a new custodian with instructions to orderly dissolve both entities and wind up the business. In response to this motion, Booth filed a memorandum in opposition, in which he stated that under § 35-1-941, MCA, a custodian does not have the power to dissolve a business entity. Booth requested that the court defer its decision to grant dissolution of Hank's and Arcane as a remedy until trial. Prior to the District Court ruling on Booth's motion, Johnson and Booth agreed on a new custodian and the court appointed the parties' selection.

¶ 11 After considering both parties' arguments, the District Court issued its order regarding Johnson's Motion for Definitive Instructions to Custodian. Pursuant to § 35-1-941(4), MCA, the District Court redesignated the recently appointed custodian as a receiver with instructions to wind up and liquidate the business and affairs of Hank's and Arcane. The court determined that the redesignation was necessary "in the best interests" of both entities, as well as the companies' shareholders and creditors. This appeal followed.

STANDARD OF REVIEW

¶ 12 We review a district court's decision to appoint a receiver under the abuse of discretion standard. Crowley v. Valley West Water Co., 267 Mont. 144, 150, 882 P.2d 1022, 1025 (1994). A district court abuses its discretion when it acts arbitrarily, without...