Petty v. Bank of New Mexico Holding Co.

• Decision Date: 19 February 1990
• Docket Number: No. 18059,18059
• Citation: 787 P.2d 443,109 N.M. 524,1990 NMSC 21
• Parties: , 58 USLW 2510 Ralph F. PETTY, Jr., Plaintiff-Appellant, v. The BANK OF NEW MEXICO HOLDING COMPANY, George L. Clark, Charles Spann, Mike Anaya, Albert Arrigoni, Culbertson & Culbertson Partnership, Marie Ellen Culbertson, Myles C. Culbertson, George H. Dapples, Sam Dazzo, Sr., George M. Fernandez, James H. Franke, Jerry A. Henson, Holiday Management Company, Jerry W. Keeran, Jeffrey P. Lane, Richard D. Lueker, Joan Lueker, Joseph C. Murray, Ronald D. McConnell, Sosimo Padilla, Ruth Padilla, Don G. Price, Ron M. Price, Alonzo D. Romero, Antonio A. Sanchez, Orhan M. Sansoy, M.D., Orhan M. Sansoy, P.A. Pension Plan, Ronald J. Shettlesworth, Mary Ellen Shettlesworth, Southwest Cardiology Associates, P.A., Spann, Latimer and Hollowwa, Ronald B. Williams, Rebecca G. Williams, Ben A. Lanford, Sr., and State Beer Distributors, Inc., Defendants-Appellees.
• Court: New Mexico Supreme Court

Page 443

787 P.2d 443

109 N.M. 524, 58 USLW 2510

Ralph F. PETTY, Jr., Plaintiff-Appellant, v. The BANK OF NEW MEXICO HOLDING COMPANY, George L. Clark Charles Spann, Mike Anaya, Albert Arrigoni, Culbertson &amp Culbertson Partnership, Marie Ellen Culbertson, Myles C Culbertson, George H. Dapples, Sam Dazzo, Sr., George M Fernandez, James H. Franke, Jerry A. Henson, Holiday Management Company, Jerry W. Keeran, Jeffrey P. Lane, Richard D. Lueker, Joan Lueker, Joseph C. Murray, Ronald D. McConnell, Sosimo Padilla, Ruth Padilla, Don G. Price, Ron M. Price, Alonzo D. Romero, Antonio A. Sanchez, Orhan M. Sansoy, M.D., Orhan M. Sansoy, P.A. Pension Plan, Ronald J. Shettlesworth, Mary Ellen Shettlesworth, Southwest Cardiology Associates, P.A., Spann, Latimer and Hollowwa, Ronald B. Williams, Rebecca G. Williams, Ben A. Lanford, Sr., and State Beer Distributors, Inc., Defendants-Appellees.

No. 18059.

Supreme Court of New Mexico.

Feb. 19, 1990.

[109 N.M. 525] Villella, Skarsgard & Noya, Patrick Villella, Albuquerque, for plaintiff-appellant.

Freedman, Boyd & Daniels, John W. Boyd, Albuquerque, for Clark.

White, Koch, Kelly & McCarthy, Bruce R. Kohl, Santa Fe, for Bank of NM Holding Co.

Charles C. Spann, Albuquerque, pro se.

Spann, Latimer & Hollowwa, James A. Artley, Albuquerque, for Spann, Latimer & Hollowwa.

Robert B. Martinez, Albuquerque, for Shettlesworths and Williamses.

OPINION

MONTGOMERY, Justice.

In this stockholder's derivative suit a minority shareholder (Petty) seeks relief from officers and directors of the corporation (the Holding Company). The complaint requests a determination that funds advanced to the defendants as litigation expenses in another suit have been wrongfully diverted from the corporation and judgment for any such improper expenditures. The district court dismissed the complaint for failure to state a claim upon which relief could be granted. Petty appeals, claiming that his complaint was sufficient to state a cause of action on behalf of the corporation for the allegedly wrongful indemnification of the officers and directors. He maintains that the New Mexico statute authorizing indemnification of directors does not bar this action.

We agree that, under New Mexico's liberal pleading rules for testing the legal sufficiency of a complaint, Petty's complaint does state a claim for relief. We hold that, under the facts pleaded in the complaint, the corporate indemnification statute does not immunize the advances to the directors and that, while there is an aspect of prematurity to Petty's complaint that might justify withholding relief at this stage, the court erred in concluding that the complaint was legally insufficient. We accordingly reverse and remand for further proceedings.

I.

Petty purchased his fifty shares (less than 1% of the outstanding common stock) in the Holding Company on September 23, 1987. One week later he addressed a letter to the Holding Company demanding that it refrain from paying any of the litigation expenses incurred by the defendants in another, pending lawsuit among persons who were Holding Company shareholders and signatories to a buy-sell and voting trust agreement relating to the corporation's stock. The next day, October 1, the corporation authorized reimbursement of its officers and directors for their legal fees, costs and expenses incurred in the defense of the other litigation.

The other litigation (the Lanford litigation), which is presently pending, is a suit by Ben A. Lanford and others against George L. Clark, president and chief executive officer of the Holding Company, against other shareholders of the Holding Company, and against the Holding Company itself, for a determination of the price at which shares of stock in the corporation will be bought and sold pursuant to a "Shareholders Buy-Sell and Voting Agreement." The agreement is a more-or-less standard agreement fixing the price at which shares of stock in the corporation shall be bought and sold among signatories to the agreement on the occurrence of certain events, and conferring on certain "Shareholder Representatives" power to vote the signatories' stock in electing members of the board of directors. The agreement is subscribed by shareholders owning over 80 percent of the stock of the Holding Company. Petty is not a party to the agreement.

On November 11, 1987--approximately one and one-half months after acquiring his stock--Petty filed in district court this suit against the Holding Company and its officers and directors. His complaint, amended by leave of court, asserts that funds belonging to the Holding Company are being expended for legal services to defend the actions and advance the private interests of the signatories to the buy-sell agreement. It further alleges that this use of corporate funds is wrongful and a breach by the officers and directors of their fiduciary and other obligations to the Holding Company and its shareholders. The amended complaint prays for the following items of relief, among others: "judgment to determine and prohibit the use of any Holding Company funds to defend the [Lanford ] litigation by and among" signatories to the buy-sell agreement; judgment against the officers and directors "who authorized the improper use of Holding Company monies for the amount advanced or wrongfully diverted"; and "a determination that the fees and costs of defense of this action" by the officers and directors may not be reimbursed by the Holding Company.

The officers and directors, defendants in the present action, moved to dismiss the complaint for failure to state a claim upon which relief could be granted, asserting the following two specific grounds: (1) Indemnification of officers and directors is specifically permitted by statute (NMSA 1978, Sec. 53-11-4.1 (1989 Supp.)), and (2) the complaint fails to allege why the directors and officers' action constitutes a breach of their fiduciary obligation. The court granted the motion, and Petty appeals.

II.

As to the second of the two grounds asserted in defendants' motion to dismiss, we think it clear that the complaint alleged sufficient facts to state a claim against the officers and directors for breach of their fiduciary duty. The foregoing recitation of facts is taken, of course, from the complaint, the allegations of which we are bound to accept as true on a motion to dismiss for failure to state a claim. Gomez v. Board of Educ., 85 N.M. 708, 710, 516 P.2d 679, 681 (1973). The question before us, at the stage of testing the legal sufficiency of a complaint, is whether the plaintiff might prevail under any state of facts provable under his claim. Id.; Hall v. Budagher, 76 N.M. 591, 592, 417 P.2d 71, 72 (1966). Under our rules of "notice pleading," it is sufficient that defendants be given only a fair idea of the nature of the claim asserted against them sufficient to apprise them of the general basis of the claim; specific evidentiary detail is not required at this stage of the pleadings. See Hambaugh v. Peoples, 75 N.M. 144, 149, 401 P.2d 777, 780 (1965) (citing 2 Moore's Federal Practice Sec. 813, 1695 [now 2A Moore's Federal Practice p 8.13 (1989) ]: "courts have recognized that the function of pleadings under the Federal Rules is to give fair notice of the claim asserted so as to enable the adverse party to answer and prepare for trial * * *") (emphasis in original opinion).

Here, the defendants were adequately apprised of the nature of Petty's claim (or more accurately, of the corporation's claim, asserted derivatively by Petty) against them, by virtue of the allegations that they had breached their fiduciary duty, or otherwise acted wrongfully, in authorizing the directors' indemnification by the Holding Company of their litigation expenses in the Lanford litigation. The most significant, if not the entire, basis for this assertion was that they had acted for their own private benefit, as signatories to the buy-sell agreement, in causing the corporation to pay their litigation expenses. These are adequate allegations under the general law surrounding corporate directors' breach of duty to the corporation and their liability to reimburse the corporation for any ensuing damage.

Although appellate courts in New Mexico have not often had occasion to discuss stockholders' derivative suits and the liability of officers, directors and controlling majority shareholders for breach of fiduciary duty to the corporation and its minority shareholders, it is thoroughly settled that an action such as this will lie, on behalf of the corporation, to restrain and seek reimbursement for disbursements by the corporation occasioned through the defendants' breach of their fiduciary or other duties owing to the corporation and the minority shareholders. "That such cause of action is proper, if well pleaded, cannot be doubted." Pope v. Lydick Roofing Co., 81 N.M. 661, 666, 472 P.2d 375, 380 (1970). Pope is one case in which such an action has been recognized; there have been countless others around the country.

The courts will protect minority stockholders against fraud or a breach of trust by officers or directors. Stockholders may obtain relief in equity against the officers of the corporation who wrongfully deal with its property to the injury of the stockholders. There is authority that minority stockholders can obtain relief against acts of mismanagement, abuse of discretion, failure to perform statutory duties, acts in violation of statute or against public policy, and negligence on the part of corporate directors or officers, through a derivative as distinguished from an individual action.

19 Am.Jur.2d Corporations Sec. 2262, at 161 (1986).

We conclude that on its face the complaint was sufficient to withstand a motion to dismiss for failure to state claim, unless some provision of law immunized the directors' conduct in authorizing indemnification in this instance.

III.

What then of the directors'...