Larson v. Midland Hosp. Supply, Inc.

• Decision Date: 18 November 2016
• Docket Number: No. 20160059,20160059
• Citation: 891 N.W.2d 364
• Parties: Stephen LARSON, Plaintiff and Appellant v. MIDLAND HOSPITAL SUPPLY, INC., Midland Pro Health, Inc., and Richard Larson, individually, Defendants and Appellees
• Court: North Dakota Supreme Court

891 N.W.2d 364

Stephen LARSON, Plaintiff and Appellant

v.MIDLAND HOSPITAL SUPPLY, INC., Midland Pro Health, Inc., and Richard Larson, individually, Defendants and Appellees

No. 20160059

Supreme Court of North Dakota.

Filed November 18, 2016

Ronald H. McLean (argued) and Ian McLean (appeared), P.O. Box 6017, Fargo, N.D. 58108–6017, for plaintiff and appellant.

C. Nicholas Vogel, P.O. Box 1389, Fargo, N.D. 58107–1389, for defendants and appellees.

Crothers, Justice.

[¶ 1] Stephen Larson appeals from a judgment entered after a bench trial dismissing his complaint against Midland Hospital Supply, Inc. ("Midland"), Midland ProHealth, Inc. ("ProHealth") and Richard Larson. We affirm, concluding the statute of limitations bars Stephen Larson's claims related to his ownership interest in Midland and the district court did not err finding he was paid for his interest in Midland.

I

[¶ 2] Midland was a North Dakota corporation engaged in the wholesale, resale distribution and sale of medical supplies until dissolved in 2007. The Larson family owned all of the shares of the corporation at all times relevant to the issues on appeal. Richard Larson was the majority shareholder and the president of the company and his brother, Stephen Larson, and their two sisters were minority shareholders. The company had a buy-sell agreement requiring any shareholder desiring to sell, transfer or encumber their shares to first offer them to the other shareholders on a pro-rata basis. If the shareholders did not purchase the offered shares, the company could redeem them. If the company or shareholders did not purchase the shares, they could be sold to any party.

[¶ 3] In April 1999 Richard Larson sent the minority shareholders a letter stating it was a good time for the minority shareholders to sell their shares. He explained that profits were down, dividends would not be paid at the same levels as in the past, the company might need to make decisions about the business that could impact the minority shareholders and they would be best served by selling their shares. In May 1999 Richard Larson sent the minority shareholders a second letter indicating the company wanted to purchase their shares by July 1999. The two sisters agreed to sell their shares. Stephen Larson declined the offer. Richard Larson personally purchased the sisters' shares, increasing his ownership interest in the company.

[¶ 4] Richard Larson obtained a loan from Midland for approximately $500,000 to purchase the shares. The loan was payable over a ten-year period with interest at 7.5 percent. Around the same time Midland borrowed over $500,000 from a bank, payable over the same time period and for the same interest rate.

[¶ 5] In 1994 Richard Larson set up ProHealth, a retail company selling medical supplies. Richard Larson was the president and sole shareholder. ProHealth purchased approximately half of its inventory from Midland. It had an outstanding accounts receivable with Midland by 2001. By the end of 2006 ProHealth owed Midland approximately $1,600,000. In August 2007, the full amount of the accounts receivable was paid. Interest on the receivable was paid in August 2008.

[¶ 6] In July 2007 Midland sold its building, inventory and additional assets to Kreisers, Inc. Kreisers also agreed to pay approximately $500,000 for goodwill and a covenant not to compete. Kreisers did not acquire Midland's accounts receivable, accounts payable or other long-term loans. Midland liquidated its remaining assets and paid off its long-term loans and its accounts payable. The remaining funds were distributed to the shareholders. At the time of the dissolution Stephen Larson owned 11.046512 percent of the company's stock, and Richard Larson owned 88.953488 percent of the stock. Stephen Larson received $493,631.38 from the distribution and an additional $42,323.49 for his share of the interest on the ProHealth accounts receivable.

[¶ 7] Stephen Larson sued for breach of fiduciary duty, conflict of interest, negligence, breach of shareholder buy-sell agreement, misappropriation, conspiracy, conversion, action for accounting and unjust enrichment. The summons and complaint were served in June 2013, and the action was filed in September 2014. Stephen Larson alleged Richard Larson breached his fiduciary duties as a corporate director and officer by diverting, misusing and misappropriating Midland's funds, engaging in self-dealing and violating the buy-sell agreement. Stephen Larson claimed he would have owned 16.6 percent of Midland stock if the company redeemed the sisters' shares as Richard Larson had informed the minority shareholders, he was not informed Richard Larson personally purchased the shares and he was not informed Midland loaned Richard Larson funds to purchase the shares. He also claimed he was not offered a loan to purchase the shares, he was not offered the opportunity to purchase the shares and Richard Larson did not comply with the buy-sell agreement. Stephen Larson claimed the Midland defendants committed wrongful acts between 1996 and 2007 which deteriorated the value of Midland by allowing ProHealth to purchase inventory at a discount without promptly paying for the inventory or paying interest on the outstanding amounts. Stephen Larson further claimed Richard Larson received an excessive salary when dividing his time between the two companies.

[¶ 8] After a bench trial the district court dismissed Stephen Larson's complaint with prejudice and awarded the Midland defendants costs and disbursements. The court found Stephen Larson's claims of alleged breaches of the buy-sell agreement and various breaches of fiduciary duties were barred by the statute of limitations. The court also found Stephen Larson was fully compensated for any damages from the buildup in accounts receivable, he failed to prove he did not receive the correct amount of proceeds from the dissolution of the company, he failed to prove the discounted inventory sales to ProHealth were unreasonable and he failed to prove Richard Larson's salary was excessive. A judgment was entered.

II

[¶ 9] The standard of review on appeal from a bench trial is well-established:

"In an appeal from a bench trial, the trial court's findings of fact are reviewed under the clearly erroneous standard of N.D.R.Civ.P. 52(a) and its conclusions of law are fully reviewable. A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, if there is no evidence to support it, or if, after reviewing all the evidence, we are left with a definite and firm conviction a mistake has been made. In a bench trial, the trial court is the determiner of credibility issues and we do not second-guess the trial court on its credibility determinations."

Serv. Oil, Inc. v. Gjestvang . 2015 ND 77, ¶ 12, 861 N.W.2d 490 (quoting Brash v. Gulleson , 2013 ND 156, ¶ 7, 835 N.W.2d 798 ) (internal citations and quotation marks omitted). "A district court's choice between two permissible views of the weight of the evidence is not clearly erroneous." Cheetah Props. 1, LLC v. Panther Pressure Testers, Inc. , 2016 ND 102, ¶ 9, 879 N.W.2d 423 (quoting Nelson v. Johnson , 2010 ND 23, ¶ 31, 778 N.W.2d 773 ).

III

[¶ 10] Stephen Larson argues the district court erred in determining the statute of limitations barred his claims for breach of the buy-sell agreement and fiduciary duties.

A

[¶ 11] The parties agree a six-year statute of limitations applies to Stephen Larson's claims under N.D.C.C. § 28–01–16. Generally, the statute of limitations begins to run from the commission of the wrongful act giving rise to the cause of action; however, that rule is subject to a discovery rule. Wells v. First Am. Bank W. , 1999 ND 170, ¶ 9, 598 N.W.2d 834.

"The discovery rule postpones a claim's accrual until the plaintiff knew, or with the exercise of reasonable diligence should have known, of the wrongful act and its resulting injury.... We have used an objective standard for the knowledge requirement under the discovery rule. The focus is upon whether the plaintiff is aware of facts that would place a reasonable person on notice a potential claim exists, without regard to the plaintiff's subjective beliefs."

Id. at ¶ 10 (citations omitted). "[N]otice of facts, which would put a person of ordinary intelligence on inquiry, is equivalent to knowledge of all of the facts a reasonable diligent inquiry would disclose." Jones v. Barnett , 2000 ND 207, ¶ 8, 619 N.W.2d 490. "[A]fter acquiring knowledge of the facts, a party has a responsibility to promptly find out what legal rights result from those facts, and failure to do so will be construed against the party." Id. "The determination of when a plaintiff's cause of action has accrued is generally a question of fact, but if there is no dispute about the relevant facts, the determination is for the court." Dunford v. Tryhus , 2009 ND 212, ¶ 6, 776 N.W.2d 539 (quoting Tarnavsky v. McKenzie Cty. Grazing Ass'n , 2003 ND 117, ¶ 9, 665 N.W.2d 18 ).

[¶ 12] The district court applied the discovery rule and concluded Stephen Larson's claims were barred by the statute of limitations. The court found Stephen Larson understood at the time of the sale of the sisters' shares that his ownership interest in Midland would increase from 11 percent to 16.6 percent if the company redeemed the shares. The court found Stephen Larson received annual financial statements and K–1s from Midland and he received the 1999 financial statement and K–1 in the spring of 2000. The court found the 1999 financial statement showed the sisters were no longer shareholders and Richard Larson's shares had increased by the amount of shares he purchased from the sisters. The statement also showed Stephen Larson's shares did not change and the K–1 showed Stephen Larson's percentage of ownership interest had not increased from 11 percent to 16.6 percent as he expected it would if Midland redeemed the sisters' shares. The court found Stephen Larson should have known...