Rapistan Corp. v. Michaels

• Decision Date: 19 January 1994
• Docket Number: 141390,Docket Nos. 139788
• Citation: 203 Mich.App. 301,511 N.W.2d 918
• Parties: RAPISTAN CORPORATION and Lear Siegler Holdings Corporation, Plaintiffs-Appellants, v. William R. MICHAELS, Michael J. Tilton, Stephen J. O'Neill, Armen G. Oumedian, James M. Cahill and Alvey Holdings, Inc., Defendants-Appellees.
• Court: Court of Appeal of Michigan — District of US

Page 918

511 N.W.2d 918

203 Mich.App. 301

RAPISTAN CORPORATION and Lear Siegler Holdings Corporation, Plaintiffs-Appellants, v. William R. MICHAELS, Michael J. Tilton, Stephen J. O'Neill, Armen G. Oumedian, James M. Cahill and Alvey

Holdings, Inc., Defendants-Appellees.

Docket Nos. 139788, 141390.

Court of Appeals of Michigan.

Submitted Oct. 5, 1993, at Grand Rapids.

Decided Jan. 19, 1994, at 9:00 a.m.

Released for Publication March 4, 1994.

Miller, Canfield, Paddock & Stone by Robert D. VanderLaan and Gary E. Mitchell, Grand Rapids, for Rapistan Corp. and Lear Siegler Holdings Corp.

Varnum, Riddering, Schmidt & Howlett by Thomas J. Mulder, Stephen P. Afendoulis and N. Stevenson Jennette III, Grand Rapids, for William R. Michaels, Michael J. Tilton, and Stephen J. O'Neill.

Gruel, Mills, Nims & Pylman by Grant J. Gruel, Grand Rapids, for Alvey Holdings, Inc.

Before FITZGERALD, P.J., REILLY and JOSLYN, ^* JJ.

PER CURIAM.

These consolidated appeals involve a claim of usurpation of a corporate opportunity by the former management of plaintiff Rapistan Corporation. Plaintiffs Rapistan and Lear Siegler Holdings Corporation appeal as of right from a March 25, 1991, order and final judgment of no cause of action in favor of defendants William R. Michaels, Michael J. Tilton, Stephen J. O'Neill, and Alvey Holdings, Inc., and from a May 13, 1991, order and judgment requiring plaintiffs to pay costs in the amount of $35,300.05. We affirm.

I

In January 1987, Lear Siegler Holdings, a Delaware corporation, acquired Lear Siegler and its subsidiaries, which included Rapistan. Rapistan, also a Delaware corporation, is one of the nation's largest manufacturers and sellers of materials-handling conveyor equipment and systems. Rapistan's marketing focus is the warehouse-distribution market. At the time of the acquisition of Rapistan by Lear Siegler Holdings, Michaels, Tilton, and O'Neill were part of the management team at Rapistan. Specifically, Michaels was the president and chief executive officer of Rapistan. He also became a shareholder in Lear Siegler Holdings. Tilton served as the vice president of finance for Rapistan. O'Neill served as the vice president of marketing and sales. Michaels, Tilton, and O'Neill resigned their positions at Rapistan on September 6, 1988. The following day, the three former Rapistan executives signed employment agreements with Alvey Holdings, Inc., a corporation created by Raebarn, Inc., a merchant bank that arranges leveraged buyouts on its own behalf and on behalf of other investors, for the purpose of acquiring Alvey, Inc., a manufacturer of both conveyors and pallitizers. A pallitizer is a machine that stacks a uniform package into layers on a pallet for further conveyance or distribution. Approximately two-thirds of Alvey's business is the manufacture and sale of conveyors. The remaining one-third of Alvey's business is the manufacture and sale of pallitizers. A pallitizer has no application in the warehouse-distribution sector of the conveyor market. Instead, a pallitizer is used in the industrial sector of the market, in such industries as food, beverage, and paper manufacturing. Raebarn and its investors acquired Alvey on August 26, 1988. At the time of trial, Michaels served as the president, chief executive officer, and chairman of the board of Alvey and Alvey Holdings. Tilton served as the chief financial officer of Alvey. O'Neill served as the senior vice president of sales and marketing at Alvey.

After learning of the involvement of the three former Rapistan executives with Raebarn and the acquisition of Alvey, the degree of which was contested at trial, Lear Siegler Holdings and Rapistan filed a complaint against Michaels, Tilton, O'Neill and several other individuals, who are not parties to the instant appeals, in the circuit court, seeking monetary damages and injunctive, declaratory, and other equitable relief. The complaint contained allegations that the former Rapistan executives breached their fiduciary duties owed to Rapistan, misappropriated a Rapistan corporate opportunity, and misappropriated and misused confidential Rapistan information. Additionally, Lear Siegler Holdings and Rapistan sought to nullify a stock subscription agreement between Michaels and Lear Siegler Holdings, pursuant to which Michaels had acquired the opportunity to purchase 825 shares of Class B common stock in Lear Siegler Holdings. This complaint was subsequently amended to add Alvey Holdings as a defendant and to allege that Alvey Holdings aided and abetted and conspired with the former Rapistan executives in the breach of the fiduciary duties owed by the executives to Rapistan.

The trial court rejected the claims of Lear Siegler Holdings and Rapistan in an opinion delivered from the bench on February 20, 1991. Specifically, the court found that Michaels, Tilton, and O'Neill learned that Alvey was for sale in their capacities as individuals, not in their capacities as Rapistan managers, that the acquisition of Alvey was not essential to Rapistan, that there was no credible evidence that Rapistan had an expectation in Alvey, that Michaels, Tilton, and O'Neill had not embarked sufficient Rapistan corporate assets on the Alvey venture to require the intervention of equity to estop the executives from denying that Alvey was a Rapistan corporate opportunity, and that Lear Siegler Holdings and Rapistan had no cause of action against defendants. The court also found that Michaels, Tilton, and O'Neill were entitled to costs from Lear Siegler Holdings and Rapistan. These appeals followed.

II

We conclude that the trial court correctly chose to apply the Guth Corollary, as originally formulated in Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503 (1939), and not the corollary as restated in Equity Corp. v. Milton, 43 Del.Ch. 160, 221 A.2d 494 (1966). We also conclude that the trial court correctly applied the law to the facts as presented and correctly determined that Michaels, Tilton, and O'Neill did not divert a corporate opportunity belonging to Lear Siegler Holdings and Rapistan to their personal use.

We review questions of law de novo. Cardinal Mooney High School v. Michigan High School Athletic Ass'n, 437 Mich. 75, 80, 467 N.W.2d 21 (1991). The parties agree that the resolution of the questions before us with regard to application of the corporate opportunity doctrine is controlled by Delaware law.

The seminal Delaware case regarding the doctrine of corporate opportunity is Guth, supra. The general principles of the corporate opportunity doctrine announced in Guth have since been referred to as the Guth Rule and the Guth Corollary. The Guth Rule provides:

[I]f there is presented to a corporate officer or a director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself. [23 Del.Ch. at 272-273, 5 A.2d 503.]

On the other hand, the Guth Corollary provides:

It is true that when a business opportunity comes to a corporate officer or director in his individual capacity rather than in his official capacity, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it if, of course, the officer or director has not wrongfully embarked the corporation's resources therein. [23 Del.Ch. at 271, 5 A.2d 503.]

See also Johnston v. Greene, 35 Del.Ch. 479, 485-486, 121 A.2d 919 (1956).

In the present case, the trial court, relying on Guth, concluded that the test for determining whether the nature of the opportunity presented by Alvey was corporate depended on whether the opportunity was first presented to Michaels, Tilton, and O'Neill in their capacities as individuals or as corporate representatives. Accordingly, the court began its analysis by examining the record evidence to determine whether the opportunity was presented to Michaels, Tilton, and O'Neill, individually. Plaintiffs argue that the trial court erred as a matter of law when it looked to the capacities of the former Rapistan executives rather than to the nature of the opportunity presented. We disagree.

Plaintiffs base their argument on the Delaware Supreme Court's restatement of the Guth Corollary in Equity Corp. v. Milton, 43 Del.Ch. 160, 221 A.2d 494 (1966). The court in Equity Corp. paraphrased the Guth Corollary as follows:

A corollary of the Guth rule is that when a business opportunity comes to a corporate officer, which, because of the nature of the opportunity, is not one which is essential or desirable for his corporation to embrace, being an opportunity in which it has no actual or expectant interest, the officer is entitled to treat the business opportunity as his own and the corporation has no interest in it, provided the officer has not wrongfully embarked the corporation's resources in order to acquire the business opportunity. [43 Del.Ch. at 164, 221 A.2d 494.]

A comparison of the language employed in the original expression of the corollary with the language employed in the Equity Corp. court's paraphrasing of the corollary reveals that the Equity Corp. court omitted the phrase "in his individual capacity rather than in his official capacity," from the original text of the corollary. Compare Guth, supra 23 Del.Ch. at 271, 5 A.2d 503, with Equity Corp., supra 43 Del.Ch. at 164, 221 A.2d 494. Plaintiffs rely on the absence of language concerning individual capacity to support their assertions that...