Locati v. Johnson, CCV95 12356; A115343.

• Decision Date: 15 March 2006
• Docket Number: CCV95 12356; A115343.
• Citation: 131 P.3d 779,204 Or. App. 683
• Parties: Norman C. LOCATI and R. Wayne Fields, Respondents, v. Bradley R. JOHNSON, Appellant, and Richard A. Elder and Univend, Inc., an Oregon corporation, Defendants.
• Court: Oregon Court of Appeals

131 P.3d 779

204 Or. App. 683

Norman C. LOCATI and R. Wayne Fields, Respondents, v. Bradley R. JOHNSON, Appellant, and Richard A. Elder and Univend, Inc., an Oregon corporation, Defendants.

CCV95 12356; A115343.

Court of Appeals of Oregon.

Argued and Submitted October 6, 2004.

Decided March 15, 2006.

Barbee B. Lyon, Portland, argued the cause for appellant. With him on the briefs were Jeanne M. Chamberlain, Portland, and Tonkon Torp LLP.

James R. Cartwright, Portland, argued the cause for respondents. With him on the brief was Brooks F. Cooper.

Before HASELTON, Presiding Judge, and LINDER and ORTEGA, Judges.

ORTEGA, J.

Defendant Bradley Johnson appeals a judgment in favor of plaintiffs Norman Locati and Wayne Fields. The judgment was entered following a trial in which a jury found that defendant breached fiduciary duties owed to plaintiffs in his capacity as a controlling shareholder. As we discuss below, this dispute is before us for the second time. See Locati v. Johnson, 160 Or.App. 63, 980 P.2d 173, rev. den., 329 Or. 287, 994 P.2d 122 (1999) (Locati I).

Defendant assigns error to the trial court's denial of his motion for a directed verdict. We review the denial of a motion for a directed verdict for any evidence to support the verdict in plaintiffs' favor. Woodbury v. CH2M Hill, Inc., 335 Or. 154, 159, 61 P.3d 918 (2003). Because there was no evidence that a breach by defendant of his fiduciary duties could have caused damage to plaintiffs, we reverse and remand for entry of judgment for defendant.¹

We state the facts in the light most favorable to plaintiffs. Id. Plaintiffs are minority shareholders of Univend, Inc. ("Univend"). Defendant and another shareholder, Elder, owned a majority of shares of Univend, and plaintiffs claim that defendant breached his fiduciary duties as a controlling shareholder. Plaintiffs founded Univend with Elder after he invented a machine that would dispense newspapers a single copy at a time, preventing customers from taking more than they paid for. Plaintiffs agreed to assist Elder in developing and marketing the machine, and the three of them founded Univend for that purpose. They obtained a patent for the machine and assigned that patent to Univend. The patent was Univend's only significant asset.

Univend contracted with Crystal Lite Manufacturing, Inc. (Crystal Lite), a metal shop owned by defendant and his wife, to manufacture the machines. In addition to agreeing on behalf of Crystal Lite to manufacture the machines, defendant also agreed to invest in Univend. At the time of the events involved in this case, defendant owned 22 percent of Univend's shares, Elder owned 37.5 percent, and plaintiffs each owned 10 percent. The other shareholders were not parties to this action.

Crystal Lite manufactured some machines for Univend, but Univend fell approximately $40,000 behind in its payments for that work. Crystal Lite then sued Univend for the unpaid $40,000. Defendant intended either to collect the debt or, failing that, to execute on Univend's assets to recoup the debt. Univend responded by filing a third-party complaint against defendant seeking to enforce an alleged stock-purchase agreement in which defendant, as part of his purchase of Univend shares, had agreed to provide Univend with a $100,000 line of credit.

Defendant initiated a shareholders' meeting for the purpose of settling the litigation between Crystal Lite, Univend, and himself. Before the meeting, defendant circulated a proposed resolution that would settle the litigation under the following terms: (1) Univend would give Crystal Lite an exclusive, 10-year license to commercially use and exploit the patent for the newspaper-dispensing machine; (2) Crystal Lite would pay $1.00 to Univend for each newspaper-dispensing machine that it sold; and (3) Crystal Lite would dismiss with prejudice its claims against Univend, and Univend would dismiss with prejudice its third-party claims against defendant.

Defendant discussed the proposed settlement with Elder before the shareholders' meeting. He told Elder that he planned to continue to produce the machines, but that he would market them more effectively than had been done before. He was prepared to make further investments in the machines through Crystal Lite, but not through Univend. Defendant told Elder that "it was a possibility down the road if everything fell into place" that Crystal Lite might involve Elder if it "needed to look at other machines, other engineering type things," but made "no promises, no guarantees." When asked whether he had made any promises to Elder about "what might be in it for him" if defendant's proposed resolution passed, defendant testified:

"I emphatically was very clear to * * * Elder, I — that I could not promise him anything, that I would not promise him anything, that he had to decide if — if he felt that this was a fair deal on the merits of what we'd talked about, um, that was written in this proposal."

Before they met at the annual shareholders' meeting, defendant and Elder made an agreement to pass defendant's proposed resolution, and Elder gave defendant a proxy, which stated that Elder "irrevocably appoints [defendant] proxy." Elder did not testify at trial.

When the shareholders' meeting was held, defendant moved for adoption of his proposed settlement and disclosed that he had a conflict of interest in voting his shares of the corporation as follows:

"In making these motions, I disclose for the record that I and my wife are the sole shareholders of Crystal Lite * * * and that I am personally a party adverse to this corporation in the lawsuit. I'm also a shareholder of [Univend]."

Elder was present at the meeting and voted his own shares; consequently, the proxy granted to defendant was never exercised, nor did defendant declare the proxy. With their combined 59.5 percent share of Univend, defendant and Elder passed the resolution, settling the litigation on defendant's terms. Plaintiffs and another shareholder, who collectively held 22.5 percent of the shares, voted against the proposal. The shareholders also elected a new board of directors that consisted of defendant, Elder, and plaintiff Locati. At the time of trial, Univend had not conducted any business since the shareholders' meeting.

Plaintiffs brought suit against defendant and Elder, alleging that they breached their fiduciary duties of loyalty and fair dealing as controlling shareholders. In Locati I, the trial court dismissed plaintiffs' claims before trial, holding that, to prove their claims, plaintiffs were required to prove "that both [defendant] and Elder acted `for their own pecuniary or other improper purpose."' 160 Or.App. at 66, 980 P.2d 173 (emphasis in original). Because the trial court concluded that there was insufficient evidence that Elder acted for an improper purpose, the court dismissed plaintiffs' claims against both Elder and defendant before trial. Id. at 66-67, 980 P.2d 173. On appeal in Locati I, we held that plaintiffs presented sufficient evidence from which a jury could find that defendant and Elder became controlling shareholders who owed fiduciary duties to the minority shareholders. Id. at 70, 980 P.2d 173. We reasoned as follows:

"[Defendant] and Elder voted together * * * as part of an express agreement to achieve a specific result with regard to both the settlement of the Crystal Lite lawsuit and the future governance of the corporation. In order to further that agreement, Elder gave [defendant] an irrevocable proxy, so that [defendant] could have achieved that result even if Elder had later changed his mind and had attempted to vote a different way at the meeting. A jury could find, thus, that [defendant] and Elder combined for the purpose of controlling the acts of the corporation and that they actually controlled those acts."

Id. at 69-70, 980 P.2d 173. We held that a jury could find that Elder and defendant, as controlling shareholders, individually owed fiduciary duties toward the minority shareholders. Id. at 70, 980 P.2d 173. Although we agreed with the trial court that there was not sufficient evidence for a jury to conclude that Elder breached any fiduciary duty, we held that there was sufficient evidence from which a jury could conclude that defendant breached his fiduciary duty...