Keller v. Estate of McRedmond

• Decision Date: 11 July 2016
• Docket Number: No. M2013-02582-SC-R11-CV,M2013-02582-SC-R11-CV
• Parties: Stephanie Keller et al. v. Estate of Edward Stephen McRedmond et al.
• Court: Tennessee Supreme Court

495 S.W.3d 852

Stephanie Keller et al.

v.Estate of Edward Stephen McRedmond et al.

No. M2013-02582-SC-R11-CV

Supreme Court of Tennessee, AT NASHVILLE.

October 1, 2015 Session

Filed July 11, 2016

John P. Branham, C. David Briley and Mandy Strickland Floyd, Nashville, Tennessee, for the appellants, Anita Sheridan, Linda Orsagh, and the Estate of Edward Stephen McRedmond.

Richard K. Smith, Nashville, Tennessee, additional counsel for the appellant, Estate of Edward Stephen McRedmond.

Roger A. Maness, Clarksville, Tennessee, and Jere R. Lee, Nashville, Tennessee, for the appellee, Louis A. McRedmond.

Holly Kirby, delivered the opinion of the Court, in which Sharon G. Lee, C.J., and Cornelia A. Clark and Jeffrey S. Bivins, JJ., joined.

OPINION

This case involves an internecine conflict among siblings who were shareholders in a closely-held family corporation. The dispute resulted in dissolution of the original family corporation, the formation of two new competing corporations, and a long-running lawsuit in which one group of shareholder siblings asserted claims against the other group of shareholder siblings. After a trial, the trial court awarded damages to the plaintiff shareholder siblings. The Court of Appeals reversed, holding that the plaintiff shareholder siblings did not have standing because their claims were derivative in nature and belonged to their new corporation. We granted permission to appeal to consider the standard for determining whether a shareholder's claim is a direct claim or a derivative claim. In this Opinion, we set aside the approach for determining whether a shareholder claim is direct or derivative described by this Court in Hadden v. City of Gatlinburg, 746 S.W.2d 687, 689 (Tenn.1988), and adopt in its stead the analytical framework enunciated by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1039 (Del.2004). Under the Tooley framework, the analysis of whether a shareholder claim is direct or derivative is based solely on who suffered the alleged harm—the corporation or the suing shareholder individually—and who would receive the benefit of the recovery or other remedy. In light of this holding, we affirm in part and reverse in part the decision of the Court of Appeals, and we remand to the Court of Appeals for further proceedings consistent with this Opinion.

FACTS AND PROCEEDINGS BELOW

Background

In 1932, two brothers, Louis McRedmond and Patrick McRedmond, formed a business partnership; perhaps not surprisingly, they called the partnership “McRedmond Brothers.” In 1957, the business was incorporated in Tennessee and renamed “McRedmond Brothers, Incorporated” (MBI). MBI's principal place of business was located at 919 Massman Drive in Davidson County, Tennessee.

MBI owned and operated a “grease business,” that is, the business purchased used grease from restaurants and other suppliers and then filtered, blended, and tested the grease to sell for reuse, primarily to animal feed manufacturers.

Over time, Louis McRedmond's family bought out the Patrick McRedmond family's interest in MBI. As a result, the sole owners of the MBI stock became Louis McRedmond and six of his ten children. Louis McRedmond owned 46% of the MBI stock; his two sons, Louis Anthony McRedmond (“Louie”) and Edward Stephen McRedmond (“Stephen”), each owned 23%; and four of his eight daughters, Anita McRedmond Sheridan (“Anita”), Edith Stephanie McRedmond Keller (“Stephanie”), Theresa McRedmond (“Theresa”), and Ellen McRedmond Kade (“Ellen”), each owned 2%.¹

In September 1996, Louis McRedmond and his six shareholder children signed an irrevocable Shareholders Agreement. Under the Shareholders Agreement, each of the shareholders agreed that they would vote their shares “in the manner directed jointly by [Louie] and [Stephen].”²

Less than a year later, in August 1997, Louis McRedmond died. He bequeathed all of his MBI shares to his ten children in equal amounts. In this way, all ten McRedmond children became shareholders in MBI. After acquiring their father's shares, Louie and Stephen each owned 27.6% of the stock. Altogether, the eight sisters owned the remaining 44.8% of the stock.

Although one of MBI's primary businesses was its grease business, the corporation also had real estate investments. Relevant to this case, MBI acquired about eleven acres of real property formerly used for industrial purposes; the parties refer to this land as the Neuhoff Property. MBI invested substantial funds to develop the Neuhoff Property for commercial use.³ During the relevant time period, Louie ran the day-to-day operations of MBI's grease business, while Stephen was involved in MBI's management and development of the Neuhoff Property.

In 2006, the seeds of the current litigation were sown. Louie and Stephen began to disagree on a number of MBI issues, in particular, MBI's plan for either developing or disposing of the Neuhoff Property.⁴ They also disagreed about who should be on MBI's board of directors.⁵ Under the Shareholders Agreement, only Louie and Stephen could vote on such matters, so their inability to agree resulted in deadlock in MBI's management.

To resolve the stalemate, Louie and six of his eight sisters filed a lawsuit to terminate the Shareholders Agreement. In December 2006, Louie and six of the sisters (Stephanie, Theresa, Ellen, Delores McRedmond (“Delores”), Julie McRedmond (“Julie”), and Mary Pauline McRedmond Vogel (“Mary”)) (collectively, “Plaintiffs”), filed a complaint for declaratory judgment and other relief in the Chancery Court for Davidson County against Stephen and the remaining two sisters (Anita and Linda McRedmond Orsagh (“Linda”)) (collectively, “Defendants”). The Plaintiffs asked the trial court to declare that Louie and Stephen were deadlocked in matters relating to the management of MBI and to terminate the Shareholders Agreement so that all MBI shareholders could vote their shares pro rata on matters affecting MBI operations.

In March 2007, MBI filed a separate declaratory judgment action in which the ten shareholders were named as defendants. This complaint sought a judicial declaration of MBI's rights and obligations due to the dispute in the first lawsuit over the control of the company. Among other things, MBI asked the trial court to declare that MBI was “an interested party to the issues raised” in the first lawsuit, in the event the cases were consolidated.

Eventually, the trial court consolidated the two cases. The proceedings, however, were bifurcated, with the trial court considering the validity of the Shareholders Agreement first.

In December 2007, the trial court conducted a trial on the validity of the Shareholders Agreement. In January 2008, it entered an order granting in part the Defendants' motion for involuntary dismissal pursuant to Rule 41.02 of the Tennessee Rules of Civil Procedure. The trial court concluded that the Shareholders Agreement was enforceable and that Louie and Stephen were “deadlocked on the issue of who should be appointed as the third member of the Board of Directors of [MBI].” In light of this ruling, the parties agreed that MBI should be dissolved. All other issues were reserved.

In April 2008, the trial court entered an order that reflected the parties' agreement to immediately begin dissolving MBI due to the brothers' deadlock, subject to further orders of the court. See Tenn. Code Ann. § 48–24–301 (2012). On September 22, 2008, the trial court entered an agreed order appointing Samuel K. Crocker as receiver for MBI. Mr. Crocker was to immediately take control of MBI's assets and records and its business, “with the understanding that [MBI] shall continue to conduct its ordinary course of operations, subject to oversight by the Receiver.” Mr. Crocker was directed to ensure that MBI's grease business was operated in a manner that would “protect its value.” The trial court enjoined “all Parties and those acting in concert with them” from taking certain actions:

Except as expressly provided above, or as authorized by the Receiver, all Parties and those acting in concert with them are hereby enjoined from taking any actions as to the business or assets of [MBI], including, without limitation, entering into any contract or obligation on behalf of [MBI], taking possession of any asset of [MBI], or expending any funds of [MBI]. Further, upon direction of the Receiver, all Parties and those acting in concert with them are hereby enjoined immediately to deliver or make available to the Receiver any asset of [MBI] in their possession, custody or control; and are subject to sanctions by this Court for failure to so do.

The trial court directed Mr. Crocker to propose a plan for dissolving MBI.

In January 2009, the trial court entered an “Initial Report of Receiver and Agreed Order.” In his report, Mr. Crocker concluded that both the grease business and the Neuhoff Property would be worth more to “certain of the Parties than they would be to anyone else,” so his proposed dissolution plan gave the parties an opportunity to purchase MBI's assets. The plan divided MBI's assets into two groups: (1) the grease business assets and (2) the Neuhoff Property/other real estate assets.⁶ These assets were to be sold to the highest bidder “'as is, where is' with no guarantees and/or warranties of any sort whatsoever.” After resolution of the creditors' claims, the receiver would distribute the sale proceeds to the ten MBI shareholders pro rata . The dissolution plan was attached to and incorporated into the trial court's order.

In February 2009, Louie submitted a bid for the grease business assets in the amount of $360,000 plus the cash-on-hand.⁷ Louie did not bid on the real estate assets. The next day, Stephen, Anita, and Linda submitted a joint bid of $758,000 for the grease business assets plus $358,000 for the Neuhoff Property and other real estate assets, for a total bid of $1,116,000. Louie made no attempt to outbid Stephen, Anita, and Linda....