Real Carriage Door Co. ex rel. Rees v. Rees
| Decision Date | 11 May 2021 |
| Docket Number | No. 53991-8-II,53991-8-II |
| Citation | 17 Wash.App.2d 449,486 P.3d 955 |
| Court | Washington Court of Appeals |
| Parties | REAL CARRIAGE DOOR COMPANY, INC., EX. REL. Scott T. REES, Mardie A. R. Broderick and Jeremy E. Broderick, Shareholders Thereof; and Scott T. Rees, Mardie A. R. Broderick and Jeremy E. Broderick, Individually, Appellants, v. Don T. REES, Respondent. |
James A. Krueger, Attorney at Law, 1201 Pacific Ave., Ste. 1900, Tacoma, WA, 98402-4315, Daniel C. Montopoli, Attorney at Law, 1201 Pacific Ave. #1900, Po Box 1315, Tacoma, WA, 98401-1315, Lucy R. Clifthorne, Vandeberg Johnson & Gandara, LLP, 1201 Pacific Ave., Ste. 1900, Tacoma, WA, 98402-4315, for Appellant.
Michael M.K. Hemphill, Roberts, Johns & Hemphill, PLLC, 7525 Pioneer Way, Ste. 202, Gig Harbor, WA, 98335-1166, for Respondent.
PART PUBLISHED OPINION
Maxa, J. ¶ 1 Scott Rees, Mardie Broderick, and Jeremy Broderick (collectively, appellants) appeal the trial court's dismissal after a bench trial of their claims against Don Rees for minority shareholder oppression, breach of fiduciary duty, and fraud.
¶ 2 Don Rees is the president, chief executive officer (CEO), and majority shareholder of Real Carriage Door Company, Inc. (RCDC), a family business. Scott1 and Mardie are Rees's children and Jeremy is his son-in-law. They are minority shareholders of RCDC who at one time worked for the company. When Rees filed for a divorce from his wife, the appellants sided with her and eventually terminated their employment with RCDC. Rees subsequently discontinued making dividend distributions to all shareholders and, to replace the dividends he ordinarily would have received as the majority shareholder, increased his own salary by over $1 million in the first year and over $700,000 in subsequent years.
¶ 3 We hold that, contrary to the trial court's conclusion, under the facts of this case Rees's conduct constituted minority shareholder oppression as a matter of law and entitles the appellants to relief. In the unpublished portion of this opinion, we affirm the trial court's dismissal of the appellants’ breach of fiduciary duty and fraud claims.
¶ 4 Accordingly, we reverse in part and affirm in part the trial court's judgment dismissing the appellants’ claims, and we remand for the trial court to determine the appropriate relief for the appellants’ minority shareholder oppression claim.
FACTS
Background
¶ 5 Rees was the founder, president, and CEO of RCDC. RCDC was converted to an S corporation organization, which meant that RCDC did not pay federal income tax at the corporate level. Instead, RCDC shareholders were responsible for paying taxes on their pro rata shares of RCDC's profits. At that point, Rees owned 51 percent and his wife Beth Rees owned 49 percent of the company's shares.
¶ 6 In 2006, Beth2 began working for RCDC and eventually took on a human resources role. Rees later created positions in RCDC for their two adult children, Scott and Mardie, and Mardie's husband, Jeremy. Between 2010 and 2013, Rees and Beth gifted shares of RCDC stock to Scott, Mardie, and Jeremy as incentive for them to continue to work for and contribute to the success of RCDC. Rees and Beth wanted the appellants to eventually take over the business.
¶ 7 Scott owned 6 percent of RCDC's shares. He managed RCDC's website and computer needs. Mardie owned 3.1 percent of RCDC's shares. She worked in sales at RCDC, but she stopped working at RCDC in October 2009 after giving birth to her child. Jeremy owned 2.9 percent of RCDC's shares. Jeremy worked as a door drafter, in pricing, and in sales engineering at RCDC.
¶ 8 After gifting Scott, Mardie, and Jeremy their respective shares, Rees retained 51 percent and Beth retained 37 percent of RCDC's shares.
Rees Separation and Divorce
¶ 9 In March 2013, Rees and Beth separated. The appellants blamed Rees for the couple's marital problems, and the appellants’ relationships with Rees deteriorated. Rees filed for divorce in April 2014. The divorce was finalized in January 2015. As part of the divorce settlement, Rees agreed to purchase Beth's ownership interest in RCDC. After this purchase, Rees now owned 88 percent of the company's shares.
¶ 10 Scott terminated his employment at RCDC in December 2014. Jeremy terminated his employment at RCDC in January 2015. None of the appellants had any further involvement with the company after January 2015.
Discontinuance of Dividends
¶ 11 Rees's and Beth's combined annual salary in the two years before 2015 was $190,000. They also received dividend distributions of $976,987 in 2013 and $1,116,257 in 2014. Before 2015, all shareholders, including the appellants, received pro rata dividend distributions on a quarterly basis. As RCDC's profits increased, the shareholders’ dividend distributions increased pro rata.
¶ 12 In 2015, RCDC – at Rees's direction – stopped distributing dividends to shareholders and began paying Rees a dramatically increased salary instead. Rees's salary was $1,213,618 in 2015, $834,562 in 2016, $973,926 in 2017, and $954,500 in 2018. In other words, instead of distributing profits to all shareholders, RCDC essentially paid those profits to Rees in the form of a salary.
¶ 13 Rees explained that the reason RCDC changed its profit distribution was because the appellants no longer worked for the company:
They had abandoned, and they had all completely left, and I was alone carrying everything; and so it didn't make sense to me to continue to pay dividends to those who were contributing nothing to the welfare and ongoing future of Real Carriage Door.
Report of Proceedings (RP) (June 19, 2019) at 52.
It was my decision that I was alone, and the minority shareholders were no longer part of the corporation in the sense that they were no longer working and contributing and making any contribution whatsoever to the corporation; and so it came to me in my business decision to not declare any dividends from the year 2015 forward and for those reasons and those reasons alone.
Complaint and Bench Trial
¶ 14 In 2018, the appellants – individually and as shareholders of RCDC – filed a lawsuit against Rees in which they asserted claims for minority shareholder oppression, breach of fiduciary duty regarding RCDC and the shareholders, and fraud. They also sought declaratory and injunctive relief. The case proceeded to a bench trial. Scott, Mardie, and Rees all testified to the facts described above.
¶ 15 The trial court issued detailed findings of fact and conclusions of law, including the following conclusions of law (which also included some factual findings):
Clerk's Papers (CP) at 264-65.
¶ 16 The trial court also entered conclusions of law that the appellants did not prove their minority shareholder oppression, breach of fiduciary duty, and fraud claims.
Therefore, the court entered a judgment that dismissed all of the appellants’ claims with prejudice.
¶ 17 The appellants appeal the trial court's judgment.
ANALYSIS
¶ 18 When reviewing a trial court's decision following a bench trial, we ask whether substantial evidence supports the trial court's findings of fact and whether those findings support the conclusions of law. Columbia State Bank v. Invicta Law Group PLLC , 199 Wash. App. 306, 319, 402 P.3d 330 (2017). Evidence is substantial if it is sufficient to persuade a rational, fair-minded person that the declared premise is true. Viking Bank v. Firgrove Commons 3, LLC , 183 Wash. App. 706, 712, 334 P.3d 116 (2014). We view the evidence and all reasonable inferences in the light most favorable to the prevailing party. Columbia State Bank , 199 Wash. App. at 319, 402 P.3d 330. On appeal, we do not review the trial court's credibility determinations. Id. Unchallenged findings of fact are treated as verities on appeal. Id.
¶ 19 Here, several of the trial court's key factual findings are included in the court's conclusions of law. If findings of fact are mischaracterized as conclusions of law, we analyze them as findings of fact. Allen v. Dan & Bill's RV Park , 6 Wash. App. 2d 349, 365, 428 P.3d 376 (2018).
¶ 20 We review the trial court's application of facts to law and the court's legal conclusions de novo. Viking Bank , 183 Wash. App. at 712, 334 P.3d 116.
¶ 21 The appellants argue that Rees engaged in minority shareholder oppression by paying RCDC's profits to himself as a salary rather than making regular dividend distributions that would benefit all the shareholders. We agree.
¶ 22 It is a recognized principle that majority shareholders "must, at all times, exercise good faith toward the minority stockholders." Hay v. Big Bend Land Co. , 32 Wash.2d 887, 897, 204 P.2d 488 (1949).
¶ 23 The foundation of a minority shareholder oppression claim is RCW 23B.14.300(2)(b). See Scott v. Trans-System, Inc. , 148...
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