McLeod v. Stevens, 78-1887

• Decision Date: 29 February 1980
• Docket Number: No. 78-1887,78-1887
• Citation: 617 F.2d 1038
• Parties: Michele McLEOD, by and through her Guardian ad Litem, Marlene B. McLeod, Appellee, v. James P. STEVENS, J. Bryan Floyd, Davis Heniford, Jr., Wendel E. Jones, Milton Clemons and Thomas M. Stevens a/k/a Thomas M. McLeod, individually and as officers and directors of Sandy Island Corporation, a corporation, and Sandy Island Corporation, a corporation, Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1038

617 F.2d 1038

Michele McLEOD, by and through her Guardian ad Litem Marlene B. McLeod, Appellee, v. James P. STEVENS, J. Bryan Floyd, Davis Heniford, Jr. Wendel E. Jones, Milton Clemons and Thomas M. Stevens a/k/a Thomas M. McLeod, individually and as officers and directors of Sandy Island Corporation, a corporation, and Sandy Island Corporation, a corporation, Appellants.

No. 78-1887.

United States Court of Appeals Fourth Circuit.

Argued Dec. 4, 1979.

Decided Feb. 29, 1980.

John A. Martin, Winnsboro (James B. Richardson, Jr., Darra Williamson Cothran, Columbia, S. C., on brief), for appellants.

D. W. Green, Jr., Conway, S. C. (Burroughs Green & Sasser, Conway S. C., on brief), for appellee.

Before BUTZNER, FIELD and WIDENER, Circuit Judges.

BUTZNER, Circuit Judge:

In this diversity action governed by South Carolina law, the district court held that the appellants, six shareholders and officers of the Sandy Island Corporation, violated the statutory and equitable rights of a minority shareholder, Michele McLeod. We find no error in the court's determination of liability and in the equitable relief it ordered, but we vacate the award of compensatory and punitive damages.

Five of the six appellants, in concert with two others who sold their shares before this suit arose, formed the corporation to hold and develop a tract of land called Sandy Island in Georgetown County, South Carolina. The sixth appellant subsequently bought shares from one of the original shareholders. McLeod is a minor. She received her shares in the corporation from her father, one of the original shareholders, as part of a property settlement incident to her parents' divorce. ^* The district court found that, upon being notified of the transfer to McLeod, the appellants embarked on a course of conduct designed to advance their own interests by violating McLeod's statutory and equitable rights. To achieve their goal, the court found, the appellants fraudulently misused and wasted corporate assets and caused the corporation to undertake ultra vires acts.

The evidence supports the district court's findings of fact, and we see no merit in the appellants' contention that these findings should be set aside as clearly erroneous.

To remedy this fraud, the district court cancelled stock the appellants had issued to dilute the value of McLeod's shares, appointed a receiver, and ordered dissolution of the corporation and distribution of its assets. In view of the evidence, these remedies were fully warranted by South Carolina law. See S.C. Code §§ 33-9-90, 33-11-210, 33-21-150, 33-21-160, 33-21-170 (1976). We therefore affirm these provisions of the court's decree.

The district court granted further relief. It ruled: "Corporate assets . . . have been wasted, misapplied, and used to promote the personal financial gain of the individual defendants. That as a result plaintiff is entitled to a full accounting . . . ." In addition to ordering an accounting, the court awarded McLeod compensatory damages in the amount of $150,000 and punitive damages in the amount of $200,000. The appellants assign error to the award of damages, contending that it is not warranted by the pleadings.

In her initial complaint, McLeod prayed for an injunction restraining the defendants from transferring illegally issued stock to any third party and for cancellation of this stock. In the first count of a supplemental complaint, McLeod alleged that she was entitled to damages. The second count of that complaint realleged all of the facts of the first count and stated specifically that the second count was intended to establish her right to have the corporation dissolved.

The supplemental complaint's prayer for relief did not seek damages. McLeod's request for an accounting, however, was explicit. She asked the court to require "an immediate accounting by the personal Defendants and directors of Sandy Island Corporation to the Plaintiff of all transactions of the corporation since May of 1970, the date of notice to the corporation of the Plaintiff's stock ownership." At the conclusion of the trial, McLeod orally moved to amend her supplemental complaint to request compensatory and punitive damages. The court took this motion under advisement and later allowed the amendment under Rule 15(b) when it entered its final order.

The propriety of the amendment for damages depends on whether the appellants received actual prior notice of McLeod's demand for damages. See 6 Wright & Miller, Federal Practice and Procedure § 1491 (1971). We conclude that they did not. The case had been pending for two years and nine months before McLeod sought the amendment. In the meantime the parties had undertaken extensive discovery, and the case was tried without a jury on pleadings that sought only equitable relief. Rule 15(b) allows amendment when the issues are tried by "express or implied consent of the parties." Here there was no express consent. The admission of evidence without objection concerning an issue that is the subject of amendment is an indicium of implied consent. 6 Wright & Miller, Federal Practice and Procedure § 1493 (1971). But all evidence of harm to McLeod was germane to the equitable relief she sought. Its admission without objection, therefore, cannot be treated as implied consent to the trial of the issue of damages. See Cook v. City of Price, 566 F.2d 699, 702 (10th Cir. 1977). The appellants protest that the belated amendment changed the nature of the action from one seeking only equitable relief to one at common law for fraud, for which they would have been entitled to a jury trial had they received timely notice of McLeod's demand for damages. In response McLeod asserts that the amendment concerned only the relief she sought...