Klinicki v. Lundgren

• Decision Date: 20 February 1985
• Docket Number: Nos. TC,s. TC
• Citation: 298 Or. 662,695 P.2d 906
• Parties: , 53 USLW 2445 F.R. KLINICKI, Petitioner on Review, v. Kim S. LUNDGREN, Berlinair, Inc., an Oregon corporation, and Air Berlin Charter Company, an Oregon corporation, Respondents on Review. F.R. KLINICKI, Respondent on Review, v. Kim S. LUNDGREN, Berlinair, Inc., an Oregon corporation, Cross-Respondent, and Air Berlin Charter Company, an Oregon corporation, Petitioner on Review. A7810-16086, CA A20084.
• Court: Oregon Supreme Court

Page 906

695 P.2d 906

298 Or. 662, 53 USLW 2445

F.R. KLINICKI, Petitioner on Review, v. Kim S. LUNDGREN, Berlinair, Inc., an Oregon corporation, and Air Berlin Charter Company, an Oregon corporation,

Respondents on Review.

F.R. KLINICKI, Respondent on Review, v. Kim S. LUNDGREN, Berlinair, Inc., an Oregon corporation,

Cross-Respondent,

and

Air Berlin Charter Company, an Oregon corporation,

Petitioner on Review.

Nos. TC A7810-16086, CA A20084.

Supreme Court of Oregon,

In Banc.

Argued and Submitted Sept. 5, 1984.

Decided Feb. 20, 1985.

Brad Littlefield, of Goldsmith, Siegel, Engel & Littlefield, Portland, and Lloyd B. Egenes, of O'Gara, Friedman, Egenes & Burke, San Francisco, Cal., argued the cause and filed a petition and response for petitioner on review/respondent on review F.R. Klinicki.

Janet A. Metcalf, of English & Metcalf, Portland, argued the cause and filed a petition and response for petitioner on review/respondent on review Air Berlin Charter Co.

JONES, Justice.

The factual and legal background of this complicated litigation was succinctly set forth by Chief Judge Joseph in the Court of Appeals opinion as follows:

"In January, 1977, plaintiff Klinicki conceived the idea of engaging in the air transportation business in Berlin, West Germany. He discussed the idea with his friend, defendant Lundgren. At that time, both men were furloughed Pan American pilots stationed in West Germany. They decided to enter the air transportation business, planning to begin operations with an air taxi service and later to expand into other service, such as regularly scheduled flights or chater flights. In April, 1977, they incorporated Berlinair, Inc., as a closely held Oregon corporation. Plaintiff was a vice-president and a director. Lundgren was the corporation's president and a director. Each man owned 33 percent of the company stock. Lelco, Inc., a corporation owned by Lundgren and members of his family, owned 33 percent of the stock. The corporation's attorney owned the remaining one percent of the stock. Berlinair obtained the necessary governmental licenses, purchased an aircraft and in November, 1977, began passenger service.

"As president, Lundgren was responsible, in part, for developing and promoting Berlinair's transportation business. Plaintiff was in charge of operations and maintenance. In November, 1977, plaintiff and Lundgren, as representatives of Berlinair, met with representatives of the Berliner Flug Ring (BFR), a consortium of Berlin travel agents that contracts for charter flights to take sallow German tourists to sunnier climes. The BFR contract was considered a lucrative business opportunity by those familiar with the air transportation business, and plaintiff and defendant had contemplated pursuing the contract when they formed Berlinair. After the initial meeting, all subsequent contacts with BFR were made by Lundgren or other Berlinair employes acting under his directions.

"During the early stages of negotiations, Lundgren believed that Berlinair could not obtain the contract because BFR was then satisfied with its carrier. In early June, 1978, however, Lundgren learned that there was a good chance that the BFR contract might be available. He informed a BFR representative that he would make a proposal on behalf of a new company. On July 7, 1978, he incorporated Air Berlin Charter Company (ABC) and was its sole owner. On August 20, 1978, ABC presented BFR with a contract proposal, and after a series of discussions it was awarded the contract on September 1, 1978. Lundgren effectively concealed from plaintiff his negotiations with BFR and his diversion of the BFR contract to ABC, even though he used Berlinair working time, staff, money and facilities.

"Plaintiff, as a minority stockholder in Berlinair, brought a derivative action against ABC for usurping a corporate opportunity of Berlinair. He also brought an individual claim against Lundgren for compensatory and punitive damages based on breach of fiduciary duty.[ ¹

"The trial court found that ABC, acting through Lundgren, had wrongfully diverted the BFR contract, which was a corporate opportunity of Berlinair. The court imposed a constructive trust on ABC in favor of Berlinair, ordered an accounting by ABC and enjoined ABC from transferring its assets. The trial court also found that Lundgren, as an officer and director of Berlinair, had breached his fiduciary duties of good faith, fair dealing and full disclosure owed to plaintiff individually and to Berlinair. The court did not award plaintiff any actual damages on the breach of fiduciary duty claim. All the issues were tried to the court, except that a jury was empaneled to try the punitive damages issue. It returned a verdict in favor of plaintiff and assessed punitive damages against Lundgren in the amount of $750,000. Lundgren then moved to dismiss plaintiff's claim for punitive damages. The court granted the motion to dismiss and, sua sponte, entered judgment in favor of Lundgren notwithstanding the verdict on the punitive damages claim." Klinicki v. Lundgren, 67 Or.App. 160, 162-63, 678 P.2d 1250, 1251-52 (1984) (footnote omitted).

ABC appealed to the Court of Appeals contending that it did not usurp a corporate opportunity of Berlinair. Plaintiff cross-appealed from the trial court's dismissal of the punitive damages claim and from the entry of judgment in favor of Lundgren notwithstanding the verdict on that issue. The Court of Appeals affirmed the trial court on all issues.

I. THE APPEAL BY AIR BERLIN CHARTER CO. (ABC)

ABC petitions for review to this court contending that the concealment and diversion of the BFR contract was not a usurpation of a corporate opportunity, because Berlinair did not have the financial ability to undertake that contract. ABC argues that proof of financial ability is a necessary part of a corporate opportunity case and that plaintiff had the burden of proof on that issue and did not carry that burden.

There is no dispute that the corporate opportunity doctrine precludes corporate fiduciaries from diverting to themselves business opportunities in which the corporation has an expectancy, property interest or right, or which in fairness should otherwise belong to the corporation. See Henn & Alexander, Laws of Corporations 632-37, § 237 (3rd ed. 1983). The doctrine follows from a corporate fiduciary's duty of undivided loyalty to the corporation. ² ABC agrees that, unless Berlinair's financial inability to undertake the contract makes a difference, the BFR contract was a corporate opportunity of Berlinair. ³

We first address the issue, resolved by the Court of Appeals in Berlinair's favor, of the relevance of a corporation's financial ability to undertake a business opportunity to proving a diversion of corporate opportunity claim. This is an issue of first impression in Oregon.

The Court of Appeals held that a corporation's financial ability to undertake a business opportunity is not a factor in determining the existence of a corporate opportunity unless the defendant demonstrates that the corporation is technically or de facto insolvent. Without defining these terms, the Court of Appeals specifically placed the burden of proof ⁴ as to this issue on the fiduciary by saying: "To avoid liability for usurping a corporate opportunity on the basis that the corporation was insolvent, the fiduciary must prove insolvency." 67 Or.App. at 165, 678 P.2d at 1254. The Court of Appeals then concluded "that ABC usurped a corporate opportunity belonging to Berlinair when, acting through Lundgren, the BFR contract was diverted" because nothing in Lundgren's testimony or otherwise in the record suggested that Berlinair was insolvent or was no longer a viable corporate entity. 67 Or.App. at 166, 678 P.2d at 1254. Accordingly, the Court of Appeals held that the constructive trust, injunction, duty to account and other relief granted by the trial court against ABC were appropriate remedies.

One commentator, Daniel Walker, in Legal Handles Used to Open or Close the Corporate Opportunity Door, 56 NW UL Rev 608 (1961), wrote that few areas of the law are as plagued with platitudes as the fiduciary responsibility of corporate officers and directors. He noted that the Supreme Court of the United States, seemingly caught up in its enthusiasm for such platitudes, strings together a whole series of them quoting from Pepper v. Litton, 308 U.S. 295, 311, 60 S.Ct. 238, 247, 84 L.Ed. 281, 291-92 (1939):

" 'He who is in such a fiduciary position cannot serve himself first and his cestuis second.... He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters * * *. He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders.... [His power] may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis.' " Walker, 56 NW UL Rev at 608 n 1.

Walker then commented:

"One aspect of corporate fiduciary responsibility that has particularly troubled the courts in their search for a rule of thumb is that relating to so-called corporate opportunities. What are the legal rules to be applied in determining when a corporate official, given an opportunity to make a profitable acquisition (business, lease, land, stock, whatever), can take it for himself rather than turning it over to the corporation? * * *

"The answer given by many courts may start with a bow to the fiduciary concept (e.g., 'Of course, those having fiduciary duty must never place themselves in a situation of divided loyalties'), but it frequently ends up with an amorphous test which may help the court state the result but rarely helps anyone find the...