Madugula v. Taub
| Decision Date | 15 July 2014 |
| Docket Number | Calendar No. 5.,Docket No. 146289. |
| Citation | 496 Mich. 685,853 N.W.2d 75 |
| Parties | MADUGULA v. TAUB. |
| Court | Michigan Supreme Court |
Mantese Honigman Rossman and Williamson, PC, Troy (by Gerard V. Mantese, Brian M. Saxe, and Mark C. Rossman ), Tangalos & Associates, Troy (by Peter S. Tangalos ), and Blum & Associates, Plymouth (by Corene C. Ford ) for Rama Madugula.
Reach Law Firm, Ann Arbor (by Ian James Reach ) and Jenner & Block LLP (by John F. Ward, Jr., and Jessica Ring Amunson ) for Benjamin A. Taub.
James L. Carey, Justin G. Klimko, Detroit, Douglas L. Toering, Troy and Cyril Moscow, Detroit, for the Business Law Section of the State Bar of Michigan.
In this case, we address whether Michigan's shareholder-oppression statute, MCL 450.1489 (§ 489) of the Business Corporation Act (BCA), MCL 450.1101 et seq., provides a right to a jury trial or whether claims under § 489 are instead required to be heard by a court of equity. We hold that the plain language of § 489 does not afford a claimant a right to a jury trial and, instead, expresses a legislative intent to have shareholder-oppression claims heard by a court of equity. We further hold that there is no constitutional right to a jury trial for claims brought under § 489. Finally, we hold that violations of a shareholder agreement may constitute evidence of shareholder oppression pursuant to § 489(3). Because the trial court erred by submitting plaintiff's § 489 claim to the jury and allowing it to award an equitable remedy, the Court of Appeals erred by affirming the trial court's judgment in favor of plaintiff. Therefore, we reverse the judgment of the Court of Appeals, reverse the judgment of the trial court in favor of plaintiff, and remand the case to the trial court to determine whether, on the present record, sitting as a court of equity, it can make the requisite findings of fact and conclusions of law under MCR 2.517(A) or whether a new trial is necessary.
Defendant Benjamin A. Taub founded Dataspace, Incorporated, in 1994. Dataspace is a technology consulting firm that focuses on constructing business intelligence and data warehouse systems. In 2002, Taub hired plaintiff, Rama Madugula, as vice president of sales and business development for Dataspace. Around this time, Dataspace also hired an individual named Andrew Flower.1 Taub was Dataspace's sole shareholder until 2004, when Madugula and Flower became part owners, with Madugula purchasing 29% of the outstanding shares and Flower purchasing 20%. The three shareholders entered into a stockholders' agreement on January 1, 2004.2 Pursuant to the agreement, Taub became president, secretary, and treasurer of Dataspace, while Madugula and Flower became vice presidents. The stockholders' agreement established a five-member board of directors and allowed Taub to elect three directors and Madugula and Flower to each elect one director.3 The agreement also contained a supermajority provision, requiring approval by the holders of 70% of the outstanding corporate stock for material changes in the nature of the business, compensation for the shareholders, or methods of determining compensation for the shareholders.4
After becoming a shareholder, Madugula continued to work for Dataspace, drawing a salary of about $150,000 a year. In 2007, Flower exercised his right under the buy-sell agreement and voluntarily withdrew from Dataspace. Taub and Madugula purchased Flower's shares, increasing Madugula's interest to about 36% of the shares. Around this time, with Dataspace allegedly struggling, Taub switched the focus of Dataspace to marketing a new product that it developed called JPAS, a software platform for jails. Madugula claims that the JPAS software was a major departure and a material change from Dataspace's prior software focus. Taub claims that it was simply an attempt to market the firm's existing jail consulting products to other counties. At the time, Madugula did not object to the new focus.
Thereafter, in August 2007, Taub terminated Madugula's employment with Dataspace. Because of his termination, Madugula no longer received a salary from Dataspace, but he maintained his board position and his interest in the company. As a shareholder, he continued to receive dividends from the company.
Madugula sued Taub and Dataspace, asserting the following six counts in the complaint: (1) shareholder oppression under § 489, (2) breach of the duty of good faith under MCL 450.1541a, (3) common-law fraud and misrepresentation, (4) exemplary damages, (5) an appointment of a receiver, and (6) an accounting of Dataspace. Madugula sought damages, the removal of Taub as a director of Dataspace, the appointment of a receiver to protect the value of his stock in Dataspace, an accounting of Dataspace, and all other relief that he was entitled to in equity or law. The circuit court granted summary disposition in favor of Taub and Dataspace, dismissing all counts against them except Madugula's claim of shareholder oppression under § 489 against Taub.5
In February 2010, Taub filed a motion in limine arguing, among other things, that Madugula did not have a right to a jury trial for his § 489 claim. In support of the motion, Taub relied on the language of § 489 and an unpublished Court of Appeals opinion, Forsberg v. Forsberg Flowers, Inc.6 After a hearing, the circuit court rejected Taub's reliance on Forsberg and denied his motion to have the § 489 claim heard in equity. The court also determined that Madugula could present evidence regarding breaches of the stockholders' agreement to establish his claim of oppression.
At trial, Madugula argued that Taub had terminated his employment with Dataspace and changed the material nature of the company without obtaining the required 70 percent supermajority vote. Taub argued that his actions were in the best interests of the company and that Madugula could not establish any oppressive conduct by Taub. The jury determined that Taub had engaged in willfully unfair and oppressive conduct that substantially interfered with Madugula's interests as a shareholder. The jury awarded economic damages of $191,675 in favor of Madugula, and it further concluded that Taub had to buy Madugula's stock in Dataspace for $1.2 million.7 The court entered a judgment in Madugula's favor for these amounts, plus interest. Thereafter, Taub moved for judgment notwithstanding the verdict or, in the alternative, for a new trial or remittitur. In this motion, he argued that the case should have never gone before a jury because a § 489 claim is equitable in nature. The court denied Taub's motions, again determining that it was not bound by Forsberg .
Taub appealed to the Court of Appeals. In an unpublished opinion, the Court of Appeals affirmed.8 First, the Court of Appeals considered whether Madugula had established shareholder oppression. After reviewing § 489, the lead opinion concluded that Taub's behavior was willfully unfair and oppressive because Madugula did not have an opportunity to vote on material changes to Dataspace or examine the corporate books.9 It also determined that there was further evidence of oppression because Taub had violated the supermajority provision in the stockholders' agreement.10 Noting that termination of employment might give rise to oppression under § 489(3), the lead opinion concluded that the termination of Madugula's services was evidence of oppression. It reasoned that Madugula's “termination disproportionately affected Madugula's interest as a shareholder because Madugula's compensation was reduced to zero and he was no longer involved in decisions on material issues such as the development of JPAS.”11 Finally, the lead opinion determined that the trial court had not abused its discretion by denying Taub's motion for a new trial based on his argument that he was entitled to a bench trial. It reasoned that Taub had failed “to cite any binding precedent suggesting that the trial court's decision on this issue or its failure to follow an unpublished opinion constitutes an abuse of discretion.”12 Judge Borrello concurred. He agreed that the trial court did not abuse its discretion by trying the matter before a jury, but he would have adopted the reasoning of the partial concurrence/dissent in Forsberg.13 Judge Ronayne Krause concurred in part and dissented in part. She concurred with the lead opinion's analysis of minority shareholder oppression and affirmance of the damages award. However, she would have remanded for a new trial on the equitable remedies, including the forced share buyout, because she believed that the equitable remedies should be determined by a bench trial.14
Taub then sought leave to appeal in this Court. We granted Taub's application and asked the parties to address:
(1) whether claims brought under MCL 450.1489 are equitable claims to be decided by a court of equity; (2) whether the provisions of a stockholders' agreement can create shareholder interests protected by MCL 450.1489 ; and (3) whether the plaintiff's interests as a shareholder were interfered with disproportionately by the actions of the defendant-appellant, where the plaintiff retained his corporate shares and his corporate directorship.15
This case involves questions of constitutional law, statutory interpretation, and contract interpretation, all of which are legal questions that we review de novo.16
Whether § 489 claims are to be decided by a court of equity depends on whether a § 489 claimant has a right to a jury trial. A right to a jury trial can exist either statutorily or constitutionally.17 We must first review the plain language of the statute to determine whether the Legislature intended to provide a statutory right to a jury trial.18 If not, we must next consider whether a § 489 claimant nonetheless has a constitutional right to...
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