Krukemeier v. Krukemeier Mach. & Tool Co., Inc.

• Citation: 551 N.E.2d 885
• Decision Date: 22 March 1990
• Docket Number: No. 30A01-8906-CV-198,30A01-8906-CV-198
• Parties: John D. KRUKEMEIER, Individually and as Shareholder of Krukemeier Machine & Tool Co., Inc. On Behalf of Such Corporation, Plaintiff-Appellant, v. KRUKEMEIER MACHINE & TOOL CO., INC., Thomas H. Krukemeier and Jeffrey J. Krukemeier, Defendants-Appellees.
• Court: Indiana Appellate Court

Page 885

551 N.E.2d 885

John D. KRUKEMEIER, Individually and as Shareholder of

Krukemeier Machine & Tool Co., Inc. On Behalf of Such Corporation, Plaintiff-Appellant, v. KRUKEMEIER MACHINE & TOOL CO., INC., Thomas H. Krukemeier and Jeffrey J. Krukemeier, Defendants-Appellees.

No. 30A01-8906-CV-198.

Court of Appeals of Indiana,

First District.

March 22, 1990.

Gustin J. Raikos, Indianapolis, Robert G. Bogigian, Greenfield, for plaintiff-appellant.

F. Keith Leach, Noblesville, Brian K. Burke, Brent D. Taylor, Baker & Daniels, Indianapolis, James L. Brand, Brand & Allen, Greenfield, for defendants-appellees.

BAKER, Judge.

STATEMENT OF THE CASE

Plaintiff-appellant, John D. Krukemeier (John), individually and as shareholder on behalf of Krukemeier Machine & Tool Co., Inc., appeals the trial court's judgment in favor of defendant-appellees, Krukemeier Machine & Tool Co., Inc. (the Company), Thomas H. Krukemeier (Tom), and Jeffrey J. Krukemeier (Jeff). We affirm.

STATEMENT OF THE FACTS

John, Tom, and Jeff are brothers. The Company is a tool and die business incorporated by their father in 1960. In 1977, the father sold each of the brothers 34 shares in the Company, giving them each one-third ownership rights. For federal income tax purposes, the Company has continuously operated under a subchapter S election since the brothers purchased it.

Prior to 1977, Tom worked at the Company for his father and has continued to work there as President and General Manager since the brothers' purchase. He works full time for the Company, approximately 60 hours per week. Jeff, the Company's Vice-President and Secretary, is principally responsible for sales and devotes approximately 50 hours per week to his job. Jeff did not work for the Company for three years during the early 1980's, but has otherwise been continuously employed there since 1977. Both Tom and Jeff are also Directors of the Company. John has never worked for the Company, even during a one and one-half year period of unemployment. He was, however, a Director and the Company's Secretary/Treasurer from 1977 until 1986.

In March of 1981, the brothers signed a repurchase agreement (Agreement) which provides for the shareholders' disposition of Company stock at book value during their life and at their death. The enforceability of the Agreement is an important issue in the case, and we will analyze relevant provisions in our discussion below.

After the fiscal year ending February 28, 1986, Tom and Jeff determined they were being undercompensated and began collecting At the next Director's meeting on September 8, 1986, Tom and Jeff voted against John in elections for the following year's Director and officer positions. Tom assumed the Treasurer's role and Jeff became Secretary. Since the meeting John has no day to day voice in the Company, but continues to receive one-third of all dividends.

salaries approximately three times greater than they had in the immediately preceding years. This decision and the events flowing from it are the nexus of the rupture between Tom and Jeff on one hand and John on the other. On April 7, 1986, Tom offered to purchase John's shares for $300,000, a price well in excess of that called for in the Agreement, which was approximately $150,000 at that time. The offer, however, included a $129,000 dividend distribution to John, reducing the net purchase price to $171,000. John refused. On April 14, 1986, Tom increased his offer to $380,000. After consulting with an accountant, John determined the fair market value of his shares was $600,000 and made a counteroffer to Tom for that price on April 18, 1986. Tom rejected the counteroffer.

John filed suit, individually and derivatively, against the Company, Tom, and Jeff for a return of excess compensation, damages for lost dividends, repurchase of his stock, appointment of a receiver, and declaration of a constructive trust. Tom and Jeff filed a counterclaim for specific performance of the Agreement.

The trial court denied Tom and Jeff's counterclaim, but nonetheless ordered specific performance, denying any other relief to John. John appeals.

ISSUES

John raises several issues which we restate as follows:

I. Whether John was required to prove that Tom's and Jeff's compensation was excessive.

II. Whether the trial court applied the appropriate standard in analyzing Tom's and Jeff's setting of compensation and dividends.

III. Whether the trial court properly ordered specific performance of the Agreement.

DISCUSSION AND DECISION

At the outset, we note our standard of review. The trial court made specific findings of fact pursuant to Ind.Trial Rule 52(A), but made no general finding. Accordingly, to affirm we must determine the specific findings are adequate to support the judgment. Matter of Dull (1988), Ind.App., 521 N.E.2d 972; Shrum v. Dalton (1982), Ind.App., 442 N.E.2d 366.

I.

John bases his first argument on the fiduciary relationship existing between majority and minority shareholders in a close corporation. Cole Real Estate Corp. v. Peoples' Bank & Trust Co. (1974), 160 Ind.App. 88, 310 N.E.2d 275. In the context of this fiduciary relationship, he asserts a minority suit alleging self-dealing by the majority in setting its own compensation places the burden of proof on the majority to show the compensation was reasonable and fair to minority interests.

John relies on Dotlich v. Dotlich (1985), Ind.App., 475 N.E.2d 331, trans. denied, and several cases from foreign jurisdictions. Dotlich and its cited precedent, Lucas v. Frazee (1984), Ind.App., 471 N.E.2d 1163, involved issues of real property conveyances. Dotlich involved a director of a close corporation who retained title to real property ultimately belonging to the corporation. In that case, this court required the defendant director to show his actions were honest and in good faith. Dotlich, supra, at 342.

On the issue of compensation, however, Cole Real Estate, supra, is controlling. "Once a corporate officer's compensation is challenged, the burden of establishing unreasonable compensation lies with the minority shareholder instituting the action." Id. 160 Ind.App. at 96, 310 N.E.2d at 280. The trial court properly allocated the burden of proof to John. ¹

II.

Closely related to the issue of which party bears the burden of proof is the issue of the standard of proof the party bearing the burden must meet. John argues the trial court erred in applying the business judgment rule to Tom and Jeff's conduct regarding salaries and dividends. The trial court did not apply the business judgment rule as codified in IND.CODE 23-1-35-1. Rather, it applied binding Indiana precedent to determine the propriety of the questioned conduct.

John argues the Company is an "incorporated partnership" for which the "rigorous fiduciary rule of partners" is the standard of proof. This argument amounts to nothing more than a restatement of the rule that shareholders in a close corporation, standing in a fiduciary relationship to one another, must deal openly, honestly, and fairly with the corporation and each other. Garbe v. Excel Mold, Inc. (1979), Ind.App., 397 N.E.2d 296. The idea of the "incorporated partnership" is recognized in Indiana. Hartung v. Architects Hartung/Odle/Burke, Inc. (1973), 157 Ind.App. 546, 301 N.E.2d 240. The phrase "incorporated partnership," however, does not refer to the standard of proof required in a compensation case. Rather, it is merely an abbreviated manner of stating what we have already observed; namely, that shareholders in a close corporation all owe a fiduciary duty to one another. The standard of proof in compensation cases requires a plaintiff shareholder to show the compensation is unjust, oppressive, or fraudulent. Green v. Felton (1908), 42 Ind.App. 675, 688, 84 N.E. 166, 170. John has failed to prove any of these elements. He argues merely that the reduction in dividend payments to him engendered by Tom and Jeff's increased salaries amounts to an illegal freeze-out. ²

Expert evidence at trial revealed Tom and Jeff were undercompensated before 1986. Moreover, the same evidence showed the increase in their salaries after that time was reasonable and a reflection of their success in making the Company a uniquely profitable enterprise. The compensation was not unjust. Nor was it oppressive. In the year ending December 31, 1987, despite the increased compensation to Tom and Jeff, total dividends were more than three times greater than in the preceding year. ³ John, an equal one-third shareholder entitled to dividend distributions, has not been oppressed. Finally, John has shown no fraud. The trial court found the compensation to Tom and Jeff was made after Board of Directors' authorization with written minutes available for John's inspection. Moreover, the court found the Company adhered to corporate norms and maintained an identity separate from that of its majority shareholders. Record at 570.

The fact that John's dividends have decreased is not tantamount to a showing of unjust, oppressive, or fraudulent conduct. The trial court properly found the compensation reasonable.

III.

John next argues the trial court erred in ordering specific performance of the Agreement. The Agreement gives remaining shareholders a right of first refusal when any shareholder desires to sell his stock. The refusal right is triggered when the retiring shareholder gives written notice to the other share holders of his desire to sell. It also requires the remaining shareholders to purchase their pro rata share of a deceased shareholder's stock. Article 4a of the Agreement states that the parties, prior to signing the Agreement, purchased life insurance on each of their lives to facilitate the immediate availability of cash for post-mortem transfer. Article 4b recites the parties' agreement to maintain the life insurance policies for the duration of the Agreement. All three brothers allowed their insurance policies to...