Red River Wings, Inc. v. Hoot, Inc.
| Citation | 2008 ND 117,751 N.W.2d 206 |
| Decision Date | 20 June 2008 |
| Docket Number | No. 20070089.,No. 20070087.,No. 20070088.,20070087.,20070088.,20070089. |
| Parties | RED RIVER WINGS, INC., Plaintiff and Appellee v. HOOT, INC., Defendant and Appellant. Richard H. Walstad, Hoadley Harris, David Butler, and John Boulger, All individually and on behalf of Canadian Wings Investment Limited Partnership, and Hoadley Harris and David Butler individually and on behalf of Manitoba Wings Investment Limited Partnership, Plaintiffs, Appellees, and CrossAppellants v. Curtis H. Kesselring and Dennis D. Leno d/b/a ME Investments, L.L.P., and Hoot, Inc., Louis Emerson, Arthur Stern, Jerry Baldwin, Patricia Corwin, Clinton L. Emerson, Jill Baldwin, Patricia Corwin Trust, Clinton L. Emerson Trust, Defendants, Appellants, and Cross-Appellees and Corwin-Wilson Management, Neil Clark, John Fercho, Mike Rufer, Data Enterprises, Wings Unlimited and Red River Wings, Inc., Defendants Hoot, Inc., as general partner in Canadian Wings Investment Limited Partnership and Manitoba Wings Investment Limited Partnership, and Louis A. Emerson, Clinton L. Emerson, Clinton L. Emerson Trust, Patricia Corwin, Patricia Corwin Trust, Jill S. Baldwin, Jerry J. Baldwin, Arthur Stern and M.E. Investments, LLP, as derivative action limited partners in Canadian Wings Investment Limited Partnership and/or Manitoba Wings Investment Limited Partnership, Plaintiffs, Appellants, and Cross-Appellees v. Thomas M. Lavelle, Red River Wings, Inc., David Dziedzic, Dyan K. Dockter, and Shelly J. Dockter, Defendants and Appellees and LTM, Inc., LTM, Inc., d/b/a LTM, Ltd., Defendants, Appellees, and Cross-Appellants and Canadian Wings Investment Limited Partnership and Manitoba Wings Investment Limited Partnership, Nominal Defendants. |
| Court | United States State Supreme Court of North Dakota |
Inc., Dyan K. Dockter, Shelly J. Dockter, Wings Unlimited and Data Enterprises and appellee and cross-appellant LTM, Inc.
Ronald H. McLean (argued) and Timothy G. Richard (appeared), Serkland Law Firm, Fargo, N.D., for appellees and cross-appellants Richard H. Walstad, Hoadley Harris, David Butler, and John Boulger, Canadian Wings Investment Limited Partnership, and Manitoba Wings Investment Limited Partnership.
Timothy R. Thornton (argued), Jonathan P. Schmidt (appeared) and Timothy G. Gelinske (on brief), Briggs & Morgan, P.A., Minneapolis, MN, and Patrick R. Morley (appeared), Morley Law Firm, Ltd, Grand Forks, N.D., for appellants and cross-appellees Curtis H. Kesselring and Dennis D. Leno d/b/a ME Investments, L.L.P., and Hoot, Inc., Louis Emerson, Arthur Stern, Jerry Baldwin, Patricia Corwin, Clinton L. Emerson, Jill Baldwin, Patricia Corwin Trust, and Clinton L. Emerson Trust.
[¶ 1] A majority of limited partners in two limited partnerships appeal from a judgment awarding damages and attorney fees to the minority of the limited partners in the limited partnerships and dismissing the majority's claims against persons and entities involved in a business dispute over two Hooters franchise restaurants in Canada. A former general partner of the limited partnerships and its principals have cross-appealed from the judgment. We affirm in part, reverse in part, and remand for further proceedings.
A
[¶ 2] Thomas M. Lavelle is a Fargo restauranteur who owns and manages restaurants through LTM, Ltd. ("LTM"), a corporation whose only shareholder is Lavelle. Dyan Dockter and Shelly Dockter are employed by the company and they oversee LTM's management duties. In the mid 1990s, Lavelle learned from Arthur Stern, who worked in the restaurant equipment supply business and had a long-standing business relationship with Lavelle, that Hooters of America was looking to expand into Canada and there was the potential to acquire a Hooters franchise there. Hooters of America approved Lavelle as a franchisee, but as a condition for getting a first franchise in Edmonton, Alberta, Lavelle had to purchase options for three additional franchises in Calgary, Alberta; Winnipeg, Manitoba; and Banff, Alberta. The franchise fee for the first restaurant was $75,000, plus a $10,000 nonrefundable fee for each of the additional option locations.
[¶ 3] Because of the expenses involved and the business risks, Lavelle decided to find investors and sought advice from a friend and retired securities broker, Louis Emerson. Emerson suggested a limited partnership as the best entity to finance and organize the venture and said he believed he could find a sufficient number of investors in the Fargo area. Emerson also recommended an attorney to draft the necessary legal documents. The attorney prepared a private placement memorandum for Canadian Wings Investment Limited Partnership ("Canadian Wings") and Lavelle formed Red River Wings, Inc. ("Red River Wings"), to serve as the general partner. The private placement memorandum informed potential investors that LTM would provide management services for the restaurants. Ownership units in Canadian Wings were offered for $80,000 per unit, and Emerson sold ten units to various investors. Many of the investors, including Richard Walstad, John Boulger, Hoadley Harris and the Harris Trust, David Butler, and ME Investments, LLP ("ME Investments"), a limited liability partnership formed by Curtis Kesselring and Dennis Leno, invested primarily because of Lavelle's reputation and involvement in the business. For their services, Stern and Emerson received fees and profits-only interests as special limited partners.
[¶ 4] Lavelle was required by the West Edmonton Mall and Hooters of America to open the first Canadian restaurant as soon as possible. In order to meet the deadline, Lavelle borrowed money to construct the Edmonton Hooters restaurant. Kesselring and Leno did not make their investment, through ME Investments, until August 1996, one month after the restaurant had opened. The Edmonton restaurant was profitable from the beginning and the limited partners received healthy returns on their investments.
[¶ 5] Under the Hooters of America franchise agreement, the option for a second Hooters restaurant in Canada had to be exercised within six months of the opening of the Edmonton restaurant. In December 1996, Lavelle offered to all partners in Canadian Wings the opportunity to invest in Manitoba Wings Investment Limited Partnership ("Manitoba Wings"), a partnership formed to own a Hooters restaurant in Winnipeg. Manitoba Wings was structured in the same manner as Canadian Wings, but the offering price per unit was $56,000 because of lower occupancy costs in Winnipeg. Emerson and Stern undertook their same roles in exchange for profits-only special limited partner interests. Emerson was unable to sell all of the units, however, and Data Enterprises, a partnership consisting of Lavelle and Dyan Dockter, and Wings Unlimited, a partnership consisting of Lavelle, Dyan Dockter, and Shelly Dockter, purchased two of the units to complete the initial offering. ME Investments, David Butler, and Hoadley Harris Trust also purchased units. Lavelle again borrowed money and advanced funds for the construction of the Winnipeg restaurant. Manitoba Wings opened the Winnipeg restaurant in March 1997 shortly before the 1997 Red River flood and in the face of bad pre-opening publicity. Nevertheless, the investors received returns on their investment, but less than the returns from the Edmonton restaurant.
[¶ 6] In spring 1998, Stern became disturbed with Lavelle over projects other than the Edmonton and Winnipeg Hooters restaurants. Stern was upset that he was not hired as a consultant for the remodeling of one of Lavelle's restaurants in Billings, Montana, and was unhappy with Lavelle's offer regarding his involvement in the development of a Hooters restaurant in Calgary. Stern sent faxes to several of the partners accusing Lavelle of dishonesty. Meanwhile, Lavelle's relationship with Emerson was also becoming strained. Emerson informed Lavelle that he had no investor prospects for the Calgary Hooters restaurant, and Lavelle decided to not use Emerson as the broker. Kesselring and Leno were also pressuring Emerson because the distributions from Manitoba Wings were not meeting his projections.
[¶ 7] ME Investments, Emerson, Stern, Jerry Baldwin, Jill Baldwin, Patricia Corwin, and Clinton Emerson held a majority of the interests in the limited partnerships. Because the majority limited partners were dissatisfied with the performance of the Winnipeg restaurant, a meeting was held in May 1998 and their concerns were addressed by an accountant. In summer 1998, the majority limited partners hired a certified public accountant to investigate the financial records of Canadian Wings and Manitoba Wings, but no evidence of wrongdoing was found. The majority limited partners were not satisfied with the report and decided to take over the management of the two partnerships. They consulted with a law firm about removing Red River Wings from the partnerships and installing a new general partner. At the suggestion of Stern, they also contacted Texas Wings, a company that managed many Hooters restaurants in the United States, about taking over the management duties of LTM. The law firm responded that if Red River Wings was removed as the general partner, the limited partnerships would terminate unless a substitute general partner was appointed in accordance with N.D.C.C. § 45-10.1-47.
[¶ 8] On October 25, 1998, the majority limited partners, through written action and without notice to minority limited partners, removed Red River Wings as the general partner of the two limited partnerships and appointed Hoot, Inc. ("Hoot"), as the replacement general partner. Hoot was a corporation formed by Kesselring and Leno for the sole purpose of serving as the replacement general partner for the limited partnerships. The majority partners also terminated the management contracts the...
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