Jordan v. Hunter

• Decision Date: 28 December 1993
• Docket Number: No. 20284,20284
• Citation: 124 Idaho 899,865 P.2d 990
• Parties: Ronald L. and Deborah L. JORDAN, husband and wife, and Sunrise Technical Services, Plaintiffs-Appellants, v. John L. HUNTER, Defendant-Respondent.
• Court: Idaho Court of Appeals

Page 990

865 P.2d 990

124 Idaho 899

Ronald L. and Deborah L. JORDAN, husband and wife, and Sunrise Technical Services, Plaintiffs-Appellants, v. John L. HUNTER, Defendant-Respondent.

No. 20284.

Court of Appeals of Idaho Dec. 28, 1993.

Hawley, Troxell, Ennis & Hawley, Boise, for plaintiffs-appellants. Eugene A. Ritti argued.

Wilson, Carnahan & McColl, Boise, for defendant-respondent. Stephanie J. Williams argued.

REINHARDT, Judge, Pro Tem.

In this appeal we are asked to determine whether the trial court correctly granted a motion for directed verdict in favor of a corporate officer defending against the claims of the corporation. Sunrise Technical Investments (the corporation) alleged that its president and bookkeeper, John Hunter, breached his fiduciary duty and committed actionable fraud in misrepresenting the value of stock redeemed by the corporation. Because we conclude there was sufficient evidence from which a jury reasonably could have found on behalf of the corporation on its claims, the directed verdict must be set aside. Accordingly, we vacate the judgment and remand the case to the trial court for further proceedings.

Facts

The following facts, viewed in a light most favorable to the plaintiff as is required on a motion for directed verdict, see Stephens v. Stearns, 106 Idaho 249, 678 P.2d 41 (1984), are supported by the trial record. Ronald Jordan and John Hunter met in late 1985. In 1986, they started Sunrise Technical Services to work on and monitor underground storage tanks for service stations. Although initially operating the business as a partnership, Hunter and Jordan later incorporated their enterprise. Reflecting their initial capital contributions, Hunter received fifty-one percent of the corporation's stock and Jordan received the remaining forty-nine percent. Both Hunter and Jordan served as managing officers, each having separate and distinct duties. Hunter acted as the corporation's president and was in charge of keeping all of the corporate books and tending to its financial affairs. As part of his responsibilities, Hunter made quarterly income tax installments, which, as permitted by law, he based upon the income earned by the corporation in the previous year. As an officer for the corporation, Hunter worked part-time for which the corporation paid him a salary.

Jordan, a petrology engineer with a degree in environmental science and prior experience in the industry, was the field technician for the business. Although he held a corporate office, he had no role in the bookkeeping, accounting or estimating of tax liabilities of the corporation. His duties were devoted entirely to working in the field, a full-time role, for which he too received a salary from the corporation.

After three years of operating the business with Hunter, Jordan determined that their personal conflicts and differences of opinion had undermined their working relationship. In October of 1989, he proposed to buy out Hunter's ownership in the corporation. Hunter refused indicating that because the corporation was doing well and was growing he was not interested in selling. When Jordan tendered his resignation, however, Hunter agreed to sell his shares and advised Jordan he would prepare a written estimate of the corporation's value to determine the price.

A few days later, Hunter sent Jordan a document entitled "Sunrise Technical Services, Inc. Stock Value Estimate As Of October 31, 1989," which briefly summarized the corporation's assets and liabilities. The "assets" section showed amounts for cash, property and equipment, accounts receivable, and also included a category for "unbilled receivables," representing anticipated income the corporation expected to earn in November and December. The total estimated value of these assets was $154,128. In the "liabilities" section Hunter recorded two items: $30,000 in accounts payable, and $3,000 in payroll and sales taxes. No figure was listed for income taxes. By subtracting the liabilities from the assets, Hunter estimated the net worth of the corporation to be $121,128. Based upon his fifty-one percent ownership, he then calculated the value of his shares to be $61,775. At the bottom of the estimate, Hunter wrote "John Hunter's stock could be purchased by Ron Jordan, personally or by the corporation as a redemption." Hunter also arranged for Jordan to talk with the corporation's accountant, a Mr. Harris, not to independently verify the valuation, but to obtain financial advice concerning which of the two proposed transactions would be most beneficial to him. When Jordan spoke with the accountant, he did not inquire about the income tax liabilities facing the corporation at the end of the year, nor did he otherwise discuss Hunter's valuation. After the consultation, Jordan concluded that it would be in his own financial interest for the corporation to redeem Hunter's shares of stock.

Jordan and Hunter later met to discuss the valuation and the purchase price for the shares. Jordan specifically asked Hunter if his estimate reflected all the taxes the corporation would owe for the year, and Hunter indicated that it did. Although Jordan had access to the business records of the corporation, he did not attempt to personally inspect them or to have the books examined by a third party, but relied on Hunter's estimate and statements. The parties agreed that the corporation, and not Jordan, would purchase Hunter's shares. Based upon Hunter's valuation, Hunter and the corporation, evidently represented by Jordan, agreed to a price of $60,500. The corporation paid Hunter in two installments and acquired all of his shares, leaving Jordan as the corporation's sole remaining shareholder.

A subsequent accounting performed in conjunction with the preparation of the corporation's 1989 income tax returns disclosed an outstanding income tax liability of $28,069. When Jordan confronted Hunter with the fact that the corporation had incurred this tax liability, Hunter replied, "I'll bet it did." Jordan then asked Hunter to reimburse the corporation for Hunter's portion of the taxes. Hunter refused and the corporation brought this lawsuit seeking recovery on the grounds of breach of fiduciary duty and fraud.

At the close of the corporation's case at trial, Hunter moved for a directed verdict pursuant to I.R.C.P. 50(a). He maintained that he owed no fiduciary duty as a matter of law, and, alternatively, if such a duty was owing, there was no proof that he had breached it. He also asserted there had been no showing that he had made any material misrepresentation of fact, and he thus was entitled to a directed verdict on the fraud claim. He additionally argued that the corporation had failed to establish it had suffered damages, an essential element under either theory of recovery, and therefore a directed verdict was proper. After considering the corporation's response, the district court directed a verdict against the corporation on both of its claims, and entered judgment in favor of Hunter. This appeal followed.

Claims on Appeal

Preliminarily, we note that the transaction at issue in this case--the corporation's redemption of its own shares of stock from Hunter--was a corporate transaction, not a transaction between shareholders. The payment of an excessive price for those shares, which is the injury claimed to have resulted from the alleged misrepresentations and omissions by Hunter, is an injury sustained by the corporation; the loss is suffered only indirectly by its shareholders. Accordingly, the right to bring an action for the injury properly belongs to the corporation alone. See 3A W.M. FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 1282 (rev. 1986) (hereinafter cited as FLETCHER). We also observe that although the pleadings aver that Hunter owed duties to Jordan flowing from Hunter's position as the corporation's controlling shareholder, there has been neither an allegation nor evidence showing that Hunter committed any wrong in this capacity, i.e., that he voted his shares to the detriment of the corporation or to oppress its minority shareholders. Compare Steelman v. Mallory, 110 Idaho 510, 716 P.2d 1282 (1986). Consequently, there is no basis for granting relief to Jordan, as an individual shareholder, in this lawsuit. Therefore, the issues on appeal concern whether the district court improvidently directed a verdict against the corporation on its claim for breach of fiduciary duty and on its claim for fraud.

Motion for Directed Verdict and Standard of Review

On a motion for directed verdict pursuant to I.R.C.P. 50(a), the moving party necessarily admits the truth of the adverse evidence and every inference that may legitimately be drawn therefrom in the light most favorable to the opposing party. Stephens v. Stearns, 106 Idaho 249, 678 P.2d 41 (1984); All v. Smith's Mgt. Corp., 109 Idaho 479, 708 P.2d 884 (1985). Such a motion should not be granted if there is substantial evidence, even if conflicting, to justify submitting the case to a jury. Curtis v. DeAtley, 104 Idaho 787, 663 P.2d 1089 (1983). Evidence is "substantial" if it is of sufficient quantity and probative value that reasonable minds could conclude that a verdict in favor of the party opposing the motion is proper. All, 109 Idaho at 842, 708 P.2d at 887; Stephens, 106 Idaho at 253, 678 P.2d at 45. Whether there is substantial evidence to create an issue of fact for the jury is a question of law. Quick v. Crane, 111 Idaho 759, 727 P.2d 1187 (1986). Hence, in deciding the motion, the trial court is not free to weigh the evidence or pass on the credibility of witnesses and make findings of fact, as it does when deciding a motion for new trial. Quick, 111 Idaho at 763, 727 P.2d at 1191. Rather, the trial judge must view all of the evidence, drawing all legitimate inferences therefrom in favor of the nonmoving party, and decide if there is substantial evidence to justify submitting ...