Midwest Management Corp. v. Stephens

• Decision Date: 18 July 1984
• Docket Number: No. 2-68757,2-68757
• Citation: 353 N.W.2d 76
• Parties: MIDWEST MANAGEMENT CORPORATION and Hollingsworth, Stephens, Clark & Koerner, Inc., Appellees, v. Morris STEPHENS and Stephens Industries, Inc., Appellants.
• Court: Iowa Supreme Court

Page 76

353 N.W.2d 76

MIDWEST MANAGEMENT CORPORATION and Hollingsworth, Stephens, Clark & Koerner, Inc., Appellees, v. Morris STEPHENS and Stephens Industries, Inc., Appellants.

No. 2-68757.

Supreme Court of Iowa.

July 18, 1984.

Rehearing Denied Aug. 16, 1984.

Robert E. Dreher of Dreher, Wilson, Adams & Jensen, Des Moines, for appellants.

Richard G. Santi of Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, Des Moines, for appellees.

Considered en banc.

UHLENHOPP, Justice.

The central question in this appeal concerns the fiduciary duty owed by a corporate director to the corporation and its shareholders when he persuades the corporation to invest essentially all of its assets in a new business venture. The case is bottomed on a breach of that duty, not on breach of contract. The parties argue numerous issues and we have considered all of them, but in this opinion we address only those which are dispositive of the appeal. The other issues do not alter the result. Another case based on the same facts was before us in Midwest Management Corp. v. Stephens, 291 N.W.2d 896 (Iowa 1980).

The proceeding is in equity, and we find the facts anew. First National Bank v. One Craig Place, Ltd., 303 N.W.2d 688, 690 (Iowa 1981). We will affirm a decree in equity if it can be sustained upon any pleaded basis which is supported by the record, regardless of the basis used by the trial court. Citizens First National Bank v. Hoyt, 297 N.W.2d 329, 332 (Iowa 1980); Krohn v. Judicial Magistrate Appointing Comm'n, 239 N.W.2d 562, 563 (Iowa 1976).

Defendant Morris Stephens (Stephens) served as a director and chairman of the investment committee of Midwest Management Corporation (Midwest) from August 12, 1969, until December 29, 1971. In the summer of 1970, a venture by Midwest into the insurance business was failing and the corporation was searching for a new avenue of investment. During the same period, Stephens' son, John A. Stephens, together with Lyman J. Clark, Jr., and Richard K. Hollingsworth, became interested in starting a broker-dealer business to deal in securities. Those three individuals, however, did not have the financial wherewithal to capitalize such a business. Endeavoring to obtain financing, the three approached Stephens and convinced him that a broker-dealer business was an odds-on favorite to succeed. At that time Stephens did not have the necessary capital available and proposed submitting the plan to Midwest's board of directors.

On July 15, 1970, Stephens, John A. Stephens, Clark, and Hollingsworth explained the proposed venture to Midwest's directors at an informal meeting. Stephens emphasized the profit-earning potential of such a business, the experience and expertise of John A. Stephens, Clark, and Hollingsworth, who would actually operate the business, and the willingness of the proposed operators and himself to invest in the venture.

On July 29, 1970, Midwest's directors met officially and negotiated a proposal to submit to the shareholders later that day. An agreement was reached that Midwest would invest $250,000, Stephens would manage the new business, and John A. Stephens, Clark, and Hollingsworth would operate it. At least two plans were considered for investment by Stephens and the other three. Midwest wanted the instigators of the proposal to have a personal financial stake as an incentive to conduct the business profitably, while Stephens and the other operators were interested in assuring their own participation in foreseen profits. One plan involved a joint venture between Midwest and Stephens' company, Stephens Industries; Midwest would invest $100,000 and Stephens Industries $150,000. The other plan involved purchases of Midwest stock by Stephens and the operators. Stephens would purchase 100,000 shares over a five-year period at $1.50 per share, while John A. Stephens, Clark, and Hollingsworth would each purchase 25,000 shares over the same time period and at the same price. Overwhelming evidence demonstrates that the latter plan was adopted and that Stephens and the other three committed themselves to purchase 175,000 shares in total. Stephens later denied that he had agreed to any such stock purchase.

At a shareholders' meeting later that day, David Stanley, the original promoter of Midwest and a Midwest director, presented the broker-dealer business proposal to the shareholders. During that presentation he explained that Stephens, John A. Stephens, Clark, and Hollingsworth were committed to the purchase of 175,000 shares of Midwest stock at $1.50 per share. Several shareholders voiced concern that the stock purchase agreement be a commitment and not merely an option; they wanted the promoters of the new business to back it with their own funds. Shareholders made clear that without such a commitment they would be reluctant to approve Midwest's investment of $250,000. At trial, several shareholders testified that but for the stock purchase commitment they would not have voted for approval. At a special shareholders meeting on September 19, 1970, the same explanations were repeated by Stanley and the same concerns were expressed by shareholders.

Stephens was present at both presentations. He did not attempt to change or correct the statements about the commitments to buy the stock. At trial, he testified as follows regarding his silence:

Q. Now, do you deny that at that [shareholder] meeting in your presence that David Stanley told the shareholders that you had committed--as part of the broker-dealer proposal that you had committed yourself to purchasing 100,000 shares of Midwest Management Company stock at $1.50 per share over a five-year period? A. I deny that I was bound by anything that Mr. Stanley said because we hadn't reached any agreement.

Q. That wasn't quite the question I asked you. Do you deny that Mr. Stanley made that statement in your presence at that shareholders' meeting? A. He may have made the statement, but I--it didn't mean anything to me.

Q. Did you render or make any objection or any comment at that meeting in response to your commitment to purchase 100,000 shares of Midwest Management Company stock at $1.50 per share over a five-year period? A. Mr. Santi, I was not negotiating with the Board or with the shareholders. I was negotiating with Mr. Stanley, and I have no reason to question what he was trying to put across, so since nothing had been agreed to, I did not raise any objections to what he said. There would be no reason to at this point. We were in negotiations.

Q. Well, if Mr. Stanley told the shareholders that you had agreed on July--on that date, July 29, 1970, to purchase 100,000 shares of Midwest Management Corporation stock at $1.50 per share over a five-year period, are you saying that you would have not made any objection to that statement at that meeting? A. I would not at that meeting, no. There would have been no reason to because there was nothing finalized between Stanley and myself.

Q. Well, if I understand what you are saying, though, the statement that Mr. Stanley would have made at that meeting would have been absolutely false? A. Mr. Stanley was presenting a program that he wanted to put across, not necessarily what I wanted to do. We were in negotiations for some time about how to put this whole thing together. It wasn't clear at that point how it should be put together. He was trying to get a definitive action in order to proceed ahead with, I suppose, more negotiations.

Q. If Mr. Stanley had made that statement at that shareholders' meeting that you had agreed to buy 100,000 shares at $1.50 per share over a five-year period, would you have considered that to have been a false statement at that time? A. It was a false statement at that time because I hadn't agreed.

Q. But you made no objection or said anything to the rest of the shareholders calling their attention to the fact that that was what you had agreed to do? A. I didn't see any reason to.

Q. What were the shareholders being asked to do with respect to this broker-dealer business at that meeting? A. My memory of the meeting was primarily to decide whether they wanted to go into the broker-dealer business and in what manner.

Q. And at that meeting did they vote to go into the broker-dealer business, or at least the majority vote? A. They voted to give the Board the right to proceed and decide what the Board wanted to do.

Midwest's board went forward with the venture. The broker-dealer business was incorporated and began operations in October 1970. It never lived up to expectations. At first its losses were small, but in the summer of 1971 losses increased substantially despite an infusion of another $150,000 by Midwest. The business closed in the fall, and a final accounting showed that it lost $325,741.11.

Stephens, John A. Stephens, Clark, and Hollingsworth were scheduled to make their initial purchase of Midwest stock on December 31, 1971. They made no purchases, and Midwest brought an action against the four for breach of contract. The district court sustained the defendants' motion for summary judgment in that case, and Midwest appealed to this court. See Midwest Management Corp. v. Stephens, 291 N.W.2d 896 (Iowa 1980). While that case was on appeal, Midwest brought this suit in equity and sought and obtained a stay of the prior case pending the outcome of the present one. In its instant petition, Midwest sought equitable relief based on breach of fiduciary duty, fraud, and promissory and equitable estoppel. After three weeks of testimony, the trial court found for Midwest and awarded it judgment against Stephens for $325,741.11, plus interest, costs, and $25,000 in exemplary damages.

I. Stephens' duty to Midwest. A director of a corporation owes the corporation complete loyalty, honesty, and good faith. Rowen v. Le Mars Mutual Insurance Co., 282 N.W.2d 639, 649 (Iowa 1979); Holi-Rest, Inc. v. Treloar, 217 N.W.2d 517, 525 (Iowa 1974); Holden v....