Lien v. Lien

• Decision Date: 21 January 2004
• Docket Number: No. 22636, No. 22621, No. 22640., No. 22622
• Parties: Bruce H. LIEN, on behalf of himself individually, and Bruce H. Lien, on behalf of other shareholders of Pete Lien & Sons, Inc., a South Dakota corporation acting on a shareholder derivative basis, Plaintiff and Appellee (# 22621, 22622, Notice of Review # 22636), Plaintiff and Appellant (# 22640), v. Charles H. LIEN, Peter C. Lien, Sandra J. Lien, and Pete Lien & Sons, Inc., a South Dakota corporation, Defendants and Appellants (# 22621), Defendants and Appellees (# 22640), and Edwin L. Hubbeling, Jerrold L. Brown, and Peter S. Birrenkott, individually and in their capacity as directors of Pete Lien & Sons, Inc., a South Dakota corporation, Defendants and Appellees (# 22640), and Barbara Jeanne Lien, Julie Anne Rathbun, Larece Lien-Shattuck, Melanie Lien Palm, Elizabeth Lucille Lien, Suzanne Lien Gabrielson, Christian B. Lien and Stephanie Anne Lien, Defendants in Intervention and Appellants (# 22622), Defendants in Intervention and Appellees (# 22640).
• Court: South Dakota Supreme Court

674 N.W.2d 816

2004 SD 8

Bruce H. LIEN, on behalf of himself individually, and Bruce H. Lien, on behalf of other shareholders of Pete Lien & Sons, Inc., a South Dakota corporation acting on a shareholder derivative basis, Plaintiff and Appellee (# 22621, 22622, Notice of Review # 22636), Plaintiff and Appellant (# 22640), v. Charles H. LIEN, Peter C. Lien, Sandra J. Lien, and Pete Lien & Sons, Inc., a South Dakota corporation, Defendants and Appellants (# 22621), Defendants and Appellees (# 22640), and Edwin L. Hubbeling, Jerrold L. Brown, and Peter S. Birrenkott, individually and in their capacity as directors of Pete Lien & Sons, Inc., a South Dakota corporation, Defendants and Appellees (# 22640), and Barbara Jeanne Lien, Julie Anne Rathbun, Larece Lien-Shattuck, Melanie Lien Palm, Elizabeth Lucille Lien, Suzanne Lien Gabrielson, Christian B. Lien and Stephanie Anne Lien, Defendants in Intervention and Appellants (# 22622), Defendants in Intervention and Appellees (# 22640).

Nos. 22621, 22622, 22636, 22640.

Supreme Court of South Dakota.

Argued August 27, 2003.

Decided January 21, 2004.

Thomas W. Stanton of DeMersseman, Jensen, Christianson, Stanton, & Huffman, Rapid City, South Dakota, Attorneys for plaintiff and appellee Bruce H. Lien (# 22621, 22622, Notice of Review # 22636) and plaintiff and appellant Bruce H. Lien (# 22640).

Jeffrey G. Hurd of Bangs, McCullen, Butler, Foye & Simmons, Rapid City, South Dakota, Attorneys for defendants and appellants Charles H. Lien, Peter C. Lien, Sandra J. Lien and Pete Lien & Sons, Inc. (# 22621) and defendants and appellees Charles H. Lien, Peter C. Lien, Sandra J. Lien and Pete Lien & Sons, Inc. (# 22640). Larry M. Von Wald of Beardsley, Jensen & Von Wald, Rapid City, South Dakota, Attorneys for defendants and appellees Edwin L. Hubbeling, Jerrold L. Brown and Peter S. Birrenkott (# 22640).

Barton R. Banks of Banks, Johnson, Colbath, Sumner & Kappelman, Rapid City, South Dakota, Attorneys for defendants in intervention and appellants Barbara Jeanne Lien, Julie Anne Rathbun, Larece Lien-Shattuck, Melanie Lien Palm, Elizabeth Lucille Lien, Suzanne Lien Gabrielson, Christian B. Lien and Stephanie Anne Lien (# 22622) and defendants in intervention and appellees Barbara Jeanne Lien, Julie Anne Rathbun, Larece Lien-Shattuck, Melanie Lien Palm, Elizabeth Lucille Lien, Suzanne Lien Gabrielson, Christian B. Lien and Stephanie Anne Lien (# 22640).

TIEDE, Circuit Judge.

INTRODUCTION

[¶ 1.] In this consolidated appeal we address: 1) the trial court's grant of partial summary judgment concerning shareholder deadlock; 2) the equitable remedy fashioned by the trial court as a result of the shareholder deadlock; 3) the trial court's dismissal of various causes of action with prejudice; and 4) the trial court's grant of a protective order and decision quashing a subpoena duces tecum. We reverse the trial court's decision on issue one, do not address issue two and affirm the trial court's decision on issues three and four.

FACTS

[¶ 2.] Pete Lien & Sons, Inc. (PLS) was originally founded in 1944 as a partnership with Bruce Lien (Bruce), Charles Lien (Charles) and their father, Pete Lien, Sr., as the co-equal partners. The business operates in the quarrying and lime industries in the Rapid City area as well as several other states. PLS was incorporated in 1952 as a South Dakota corporation with the three partners as equal shareholders. Since its inception, PLS's corporate governing documents have restricted the right of a shareholder to freely sell or transfer shares except to another shareholder. Over the years Pete Lien, Sr. gifted and sold stock to Bruce and Charles. When he died in 1969, Bruce and Charles inherited the remainder of his stock and each became fifty percent shareholders of the corporation. PLS authorized and issued both voting and non-voting stock.

[¶ 3.] PLS grew and prospered into a company with approximately 450 employees and an annual payroll of approximately $17 million. Both Bruce and Charles were actively involved in PLS. Bruce testified that he was responsible for most of the company's financing as well as seeking new opportunities for the company's expansion. Bruce resigned from PLS's executive committee in 1982, but continued to serve on the board of directors as the chairman. Charles served as president of PLS between 1982 and 1996. He was also chief operating officer from 1985 until 1996. At the time of trial, Bruce was 75 years old and Charles was 73 years old. While both diminished their day-to-day role in PLS in recent years, they continued to serve on the board of directors.

[¶ 4.] Bruce is married and has no children. Charles is married and has nine children (collectively referred to as the Nine Liens). Four of Charles' children are presently employed by PLS-defendants Pete Lien and Sandra Lien and defendants in intervention Suzanne Lien Gabrielson and Christian B. Lien (Four Liens). Pete Lien is the president of PLS and on the board of directors. Sandra Lien is currently vice president of corporate development for all PLS divisions. Suzanne Lien Gabrielson is chief financial officer. Also, two of the Four Liens have spouses that are employed in management positions with PLS. Several other children and grandchildren of Charles are either involved with contract work for PLS or work at PLS.

[¶ 5.] Bruce holds 50 percent of the voting and non-voting shares. Charles holds 50 percent of the voting shares, but has either sold or gifted some of his non-voting shares to his wife and each of his nine children. Over the years, Bruce executed various documents that demonstrated a willingness to either gift his shares in PLS or sell them at a favorable price to the Nine Liens during his lifetime or upon his death. However, all parties testified that it was understood that Bruce was under no obligation to do so.

[¶ 6.] The current board of directors for PLS consists of seven members. Four Lien family members-Bruce, defendants Charles, Pete Lien, and Sandra Lien, and three non-family, long-time employees-defendants Edwin Hubbeling, Jerrold Brown and Peter Birrenkott. Directors have not been elected since 1998.

[¶ 7.] Bruce and Charles have often disagreed as to the future direction of PLS. Bruce has pushed for the company to be sold privately or converted to a publicly owned corporation. Charles has resisted both alternatives although, on occasion, he has agreed to consider a proposal. Bruce and Charles are equally compensated from PLS. All dividends are distributed pro rata in accordance with the respective share holdings. As the holder of more shares in the corporation than any other single individual, Bruce receives more income and dividends than any other shareholder. However, as it relates to the distribution of dividends there has been considerable disagreement concerning whether to authorize dividends and, if so, in what amount.

[¶ 8.] Charles' vision is to preserve PLS for future generations of the Lien family by controlling present returns and thereby allowing for the growth of PLS. Generally, Charles advocates for the distribution of dividends only to meet the payment of a shareholder's individual income tax liability arising from the status of PLS as a subchapter S corporation. Whereas, Bruce wants to increase present returns and desires to maximize current payments of dividends. In support of this position, Bruce pursued a course of action involving subordinated notes. In this regard, Bruce requested that PLS declare dividends equal to 100 percent of net earnings for a year on the condition that the shareholders loan back those amounts to PLS. The shareholders would then receive notes subordinate to PLS's debt to its bank creditors. PLS would then pay interest to the shareholders on this subordinated debt in addition to payment of the principal on the loans. At Bruce's urging, PLS issued subordinated notes from 1992 to 1997.

[¶ 9.] In December 1998 a board meeting was held and the issue of payment of dividends was addressed. Charles made a motion, supported by his son Pete, to only pay dividends for the purposes of paying shareholders' tax liability until the corporation reduced its debt level to $8.5 million. This was contrary to Bruce's desire to issue subordinated notes. Despite Bruce's strong opposition to this motion, the other six directors agreed that it was not advisable to issue subordinated notes and determined that dividends would be paid for purposes of shareholder tax liability only. After this meeting, Bruce stated that he would vote against the existing board at the next shareholders' meeting and elect directors that would vote as he desired. He further threatened that if he won control of the board of directors he would fire certain senior members of PLS's management. There was testimony that he contacted directors and told them they would be on his list unless they changed their vote on the issue of dividends, apologized to him for voting against his position as to dividends and resigned from the board.

[¶ 10.] In response to Bruce's threats, the board passed a resolution at the March 29, 1999, board meeting providing for a director qualification. The director qualification provided that no person could serve as a director unless he or she had previously served on the board or had been an officer of the corporation for at least five years. Bruce has not attended shareholders' meetings or directors' meetings since the passage of the director qualification resolution. Since Bruce and Charles each hold 50 percent of the voting shares in the corporation, Bruce's refusal to attend shareholders' meetings has resulted in the lack of a quorum for purposes of electing new directors.

[¶ 11.] In April 2000 Bruce brought this action against PLS and the other members of the board of directors¹ alleging minority shareholder oppression, breach of fiduciary duty, and tortious interference with prospective business relations...