Lynch v. Patterson, s. 84-185
| Decision Date | 14 June 1985 |
| Docket Number | 84-186,Nos. 84-185,s. 84-185 |
| Citation | 701 P.2d 1126 |
| Parties | Birl LYNCH and R.C. Lynch, Appellants (Defendants), Eunice Lynch, Lynch Consultants, Inc., a Wyoming corporation, and Lynch Management Services (Defendants), v. Pat PATTERSON, in his individual capacity as stockholder of Lynch Consulting, Inc., a Wyoming corporation, Appellee (Plaintiff). Pat PATTERSON, in his individual capacity as stockholder of Lynch Consulting, Inc., a Wyoming corporation, Appellant (Plaintiff), v. Eunice LYNCH, Appellee (Defendant), Birl LYNCH, R.C. Lynch, Lynch Consultants, Inc., a Wyoming corporation, and Lynch Management Services (Defendants). |
| Court | Wyoming Supreme Court |
James R. McCarty, Casper, for Birl Lynch, R.C. Lynch and Eunice lynch.
Harry E. Leimback, Casper, for Pat Patterson.
Before THOMAS, * C.J., and ROSE, ROONEY, ** BROWN and CARDINE, JJ.
These appeals stem from a stockholders' derivative action brought by Pat Patterson, a minority stockholder of Lynch Consulting Services, Inc., to recover damages allegedly resulting from actions taken by the three corporate directors in violation of their fiduciary duties to the corporation. The defendant directors and corporation counterclaimed against Patterson, alleging that he breached his fiduciary duties as a former director by entering into competition with Lynch Consulting Services, Inc. Following trial, the district court ruled that directors Birl Lynch and R.C. Lynch had engaged in certain instances of self-dealing that were unfair to the corporation, and awarded Patterson $79,800 in damages. The court dismissed Patterson's claims against director Eunice Lynch and Lynch Management Services, a partnership made up of defendants Birl Lynch and R.C. Lynch. The court also dismissed the counterclaim against Patterson. We will direct correction of computation errors and affirm the judgment in all respects.
In October, 1979, Pat Patterson purchased a 30 percent interest in an oil-field consulting business operated by Birl Lynch and his son, R.C. Lynch. The three individuals conducted business as a partnership until April, 1980, when they incorporated under the name of Lynch Consulting Services, Inc. (LCS). Thirty percent of the corporate voting stock was issued to Patterson and 35 percent each to Birl Lynch and R.C. Lynch. The three shareholders served as the directors and officers of the corporation.
In February, 1981, Patterson informed the other directors of his desire to either buy their shares or sell his own. No agreement was reached concerning this proposal, and on February 28, 1981, Patterson resigned from his positions as vice president and director of the corporation. During the following month, Patterson formed his own consulting company and subsequently worked for Sunmark Exploration on a job which he had generated while serving as a director and officer of LCS. Eventually, Patterson acquired the business of several former LCS clients.
At a special meeting of the LCS board of directors on February 28, 1981, Birl Lynch and R.C. Lynch accepted Patterson's resignation and appointed R.C. Lynch vice president of the corporation. Eunice Lynch, the wife of Birl Lynch, was elected secretary of the board. 1 According to the minutes of that meeting, the directors, in recognition of the increased responsibilities to Birl Lynch and R.C. Lynch, doubled the compensation of Birl Lynch and R.C. Lynch for a total monthly income to each of $8,000.
From March 1, 1981, through December, 1981, Birl Lynch and R.C. Lynch received the salaries approved by the board at the February 28th meeting and, in addition, drew $7,416.58 each in bonuses. At a special meeting held January 1, 1982, the directors Pursuant to the agreement between the two companies, LCS, in January, 1982, began paying LMS $17,000 per month in management fees. LMS disbursed $16,000 of this money in monthly salaries to Birl Lynch and R.C. Lynch and retained $1,000 for expenses. While receiving these fees, LMS sought business as an oil-field consultant in its own right and was continuing to do so at the date of trial. The corporate shareholders received no benefit from the business acquired for the management company.
voted unanimously to discontinue payment of these salaries and to hire Lynch Management Services (LMS), a newly formed partnership composed of Birl Lynch and R.C. Lynch, to manage the corporation. The directors further agreed, by unanimous vote, to convene regularly and to pay Birl Lynch and R.C. Lynch monthly directors' fees of $1,300 each.
During the first complete fiscal year under the management of LMS (May 1, 1982, through April 30, 1983), the corporation operated at a net loss of $302,744, compared to $91,928 in net earnings from operations during the previous fiscal year. On April 30, 1983, the corporation's liabilities exceeded its assets by $105,494. One year earlier the corporation's net assets had amounted to $362,274.
Lynch Management Services, on the other hand, posted net earnings of $154,950 during its first year of existence (January 1, 1982, through December 31, 1982). Its net assets increased from the partners' original contribution of $969 to $11,572. Furthermore, in the year prior to trial, LMS acquired three consulting jobs for itself, but none for LCS.
At the February and March, 1982, board meetings, the directors of LCS agreed to purchase two city lots for the construction of an office building. The corporation paid $85,000 for the property and sold it four months later, by unanimous vote of the directors, to Birl Lynch and R.C. Lynch for $75,000.
Based on these facts adduced at trial, the district judge concluded that Birl Lynch and R.C. Lynch, as directors of LCS, were fiduciaries to Patterson, a minority shareholder. The court ruled that Birl Lynch and R.C. Lynch had engaged in self-serving transactions with the corporation and had failed to establish the fairness of their dealings. The court found the following corporate expenditures to be improper:
Director's Fees $ 26,000
Increased officers' salaries of $4,000
per month for each of two defendants
from March 1, 1981, through
December 31, 1981 $ 80,000
Management fees actually paid to
LMS, less proper expenditures for
administration and salaries of $9,000
per month for 16 months $150,000
Benefit to Birl Lynch and R.C. Lynch
from sale of real property $ 10,000
--------
TOTAL $266,000
The trial judge ruled that Birl Lynch and R.C. Lynch were directly liable to Patterson for his pro-rata share of these losses sustained by the corporation. Accordingly, the court entered judgment against Birl Lynch and R.C. Lynch for $79,800, the amount due to Patterson as a result of his 30 percent interest in the corporation. Patterson's claim against Eunice Lynch and the defendants' counterclaim were dismissed.
ISSUES
Birl Lynch and R.C. Lynch present the following questions for our consideration:
fees paid by the corporation to Lynch Management Services.
Patterson raises a single issue:
"Whether the District Court erred in releasing the Defendant Eunice Lynch from responsibility under the judgment awarded to Pat Patterson, Plaintiff."
The parties as well as the trial court treated this litigation as a stockholders' derivative suit brought on behalf of the corporation. As a general rule, recovery in such actions inures to the corporation rather than to the stockholders as individuals. Note, Shareholders' Right to Direct Recovery in Derivative Suits, 17 Wyo.L.J. (1963). We referred to this principle in Centrella v. Morris, Wyo., 597 P.2d 958, 962 (1979), quoting from Smith v. Stone, 21 Wyo. 62, 95, 128 P. 612, 621 (1912):
" ' * * * The stockholder, either individually or as the representative of the class, may commence the [derivative] suit, and may prosecute it to judgment; but in every other respect the action is the ordinary one brought by the corporation, it is maintained directly for the benefit of the corporation, and the final relief, when obtained, belongs to the corporation, and not to the stockholder-plaintiff.' " Quoting from the early work of Pomeroy's Equity Jurisprudence (3d Ed.), § 1095.
Nevertheless, courts sometimes permit pro-rata recovery by individual shareholders to prevent an award from reverting to the wrongdoers who remain in control of the corporation. Backus v. Finkelstein, 23 F.2d 357 (D.Minn.1927); Dill v. Johnston, 72 Okl. 149, 179 P. 608 (1919); Crichton v. Webb Press Co., Ltd., 113 La. 167, 36 So. 926 (1904); Eaton v. Robinson, 19 R.I. 146, 31 A. 1058 (1895). See also Perlman v. Feldman, 219 F.2d 173 (2nd Cir.1955). The federal district court in Backus v. Finkelstein reasoned that individual recovery was necessary to avoid further litigation:
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