River Management Corp. v. Lodge Properties Inc.

Decision Date09 May 1991
Docket NumberNo. 89CA1068,89CA1068
Citation829 P.2d 398
PartiesRIVER MANAGEMENT CORPORATION, Plaintiff-Appellee, v. LODGE PROPERTIES INC., and Orient-Express Hotels Inc., formerly Seaco Inc., Defendants-Appellants, v. Allen P. BEBEE, Third-Party Defendant-Appellee. . V
CourtColorado Court of Appeals

Berniger, Berg, Rioth & Diver, P.C., Joseph W. Diver, Colorado Springs, for plaintiff-appellee and third-party defendant-appellee.

Holland & Hart, Gordon G. Griener, A. Bruce Jones, Denver, for defendants-appellants.

Opinion by Judge DAVIDSON.

Defendants, Lodge Properties, Inc. (LPI) and its majority shareholder, Orient-Express Hotels, Inc., (OEH) appeal the entry of judgment after a bench trial in favor of the minority shareholder, River Management Corporation (RMC) on its claims of breach of fiduciary duty, and waste and mismanagement of corporate assets. LPI and OEH also appeal the trial court's order granting RMC damages for undervaluation of its stock. We affirm in part, reverse in part, and remand.

The following facts are not in dispute. In 1978, Allen Bebee, the president and controlling shareholder of RMC, was approached by one of the owners of a hotel/condominium complex in Vail, Colorado, known as the "The Lodge at Vail," about purchasing that business. Bebee contacted OEH, then known as SeaCo, Inc., to encourage it to join RMC in purchasing the lodge.

In 1980, OEH, RMC, LPI, and Bebee entered into a stockholders' agreement which contemplated that LPI would acquire the corporate entities which owned the lodge. Pursuant to this agreement, OEH acquired 90% of the shares of LPI stock for $90,000, and RMC acquired the remaining 10% of the shares for $10,000. This agreement also contained a provision which gave OEH the option to purchase all of RMC's stock after January 1985 for its fair market value.

The following January, LPI, a Colorado corporation, acquired the lodge through a stock purchase for $5,657,000. Shortly thereafter, Bebee and other officers and employees of OEH including James Sherwood, its chief executive officer, became directors of LPI.

During the next four years, extensive renovations were performed on the lodge, and LPI's net operating income declined substantially. To cover the operating expenses and pay for the renovations, LPI borrowed large amounts from OEH. As a result, LPI's debt significantly increased.

In March 1985, RMC commenced this action for an involuntary dissolution of LPI pursuant to § 7-8-113, C.R.S. (1986 Repl.Vol. 3A) claiming oppression by OEH, the majority shareholder. Then, two months later, OEH gave notice to RMC of its election to purchase all of RMC's shares of LPI stock and offered $100,000 which RMC rejected. Shortly thereafter, a shareholders meeting was held in which Bebee was removed as an LPI director.

Pursuant to the stockholders' agreement, Merrill Lynch conducted an appraisal of LPI's stock and concluded that because of LPI's high debt, as of May 1985, its stock had only a nominal value. OEH then transferred RMC's shares of LPI stock to itself and tendered a check to RMC for $100. RMC opposed the transfer and never cashed the check.

RMC then amended its complaint to include claims of breach of fiduciary duty, waste and mismanagement, and inadequate compensation for its shares of LPI stock based upon an undervaluation of LPI's assets by Merrill Lynch. LPI counterclaimed against RMC for half of Merrill Lynch's appraisal cost and also brought a third-party claim against Bebee, alleging that he had breached his fiduciary duty to LPI by interfering with LPI's management.

A two-week trial to the court was held at which the parties submitted extensive testimony by expert witnesses. The trial court then made detailed findings of facts and concluded that OEH had failed to provide Merrill Lynch with pertinent information regarding LPI's assets, thereby causing it to undervalue LPI's shares. As a result, the court awarded RMC $444,360 plus interest in damages against OEH.

The court further found that although OEH and LPI had breached their fiduciary duty to RMC by managing LPI in a manner that was inherently unfair to RMC, and by committing waste and mismanagement, dissolution of the corporation was not the appropriate remedy. Rather, the court awarded RMC damages in the amount of $794,970 with interest. The court also found in favor of OEH on its claim against RMC for half of the cost of the appraisal, but denied defendants' third-party claim against Bebee.

This appeal followed.


Defendants first contend that the trial court erred in awarding damages to RMC because Merrill Lynch undervalued LPI's assets. Specifically, they argue that the stockholders' agreement provides that OEH was only required to pay RMC fair market value of its stock as determined by Merrill Lynch. If an error was made in assessing this value, defendants contend, then RMC's only remedy is against Merrill Lynch. Defendants also contend that the trial court erred in determining the value of LPI's assets. We disagree.

Preliminarily, we note that the stockholders' agreement provides that it shall be governed by and construed in accordance with the laws of the state of New York. Accordingly, the propriety of OEH's buyout of RMC's shares is governed by New York law. However, on matters of procedure, the laws of the forum court govern. Therefore, our standard of review on appeal is governed by Colorado law. See Apache Village, Inc. v. Coleman Co., 776 P.2d 1154 (Colo.App.1989).


Directors of a corporation have a fiduciary duty to protect the stockholders' interests and are required to discharge this duty in good faith. Giblin v. Murphy, 97 A.D.2d 668, 469 N.Y.S.2d 211 (1983).

In a close corporation, "the relationship between shareholders is akin to that between partners." In re Dissolution of T.J. Ronan Paint Corp., 98 A.D.2d 413, 469 N.Y.S.2d 931 (1984). Thus, majority shareholders and directors in close corporations owe the "highest degree of fidelity, loyalty, trust, faith and confidence" to their shareholders, Taines v. Gene Barry One Hour Photo Process, Inc., 123 Misc.2d 529, 474 N.Y.S.2d 362 (1983), and are required to exercise their utmost good faith and "cannot use their corporate power in bad faith or for their individual advantage." Levine v. Styleart Press, Inc., 31 Misc.2d 106, 217 N.Y.S.2d 688 (1961).

Furthermore, when parties contract with each other, they must also deal with each other fairly and in good faith. Integrated Sales, Inc. v. Maxell Corporation of America, 94 A.D.2d 221, 463 N.Y.S.2d 809 (1983).

It is undisputed that prior to May 1985, LPI had acquired an option to purchase certain privately owned land. Subject to approval by the Forest Service, LPI proposed to acquire this land for approximately $1.2 million and then exchange it for two other parcels owned by the Forest Service. One of these parcels, the "Spraddle Creek" parcel, overlooks the town of Vail and the ski slopes, and the other parcel is a 2.5-acre tract immediately adjacent to the lodge. The record shows that by May 1985, LPI had spent almost $500,000 to obtain the option to purchase the private land in order to effectuate this "land swap."

The trial court found that information regarding LPI's interest in the "land swap" was not supplied to Merrill Lynch when it assessed the fair market value of LPI's assets. Thus, this asset was not included in Merrill Lynch's evaluation. Relying on the provision in the shareholders' agreement which provided that OEH would pay fair market value of RMC's share, the trial court determined that defendants were liable for the increase in the stock's fair market value attributable to the "land swap" asset. We agree.

Insofar as defendants contend that they cannot be held liable for the omission of this asset in the report because the trial court did not find that they intentionally failed to provide this information, we disagree.

OEH, as the majority shareholder, had a fiduciary duty to act in good faith to RMC. Levine v. Styleart Press, Inc., supra. Implicit in this duty is OEH's responsibility to provide Merrill Lynch all relevant information so that it could fairly assess LPI's stock value.

Contrary to defendant's contention, it is irrelevant whether the misrepresentation to Merrill Lynch regarding LPI's assets was intentional or negligent. OEH is still liable for the fair market value of LPI's shares. See Fox v. Heatherton, 281 A.D. 748, 118 N.Y.S.2d 156 (1953).

Furthermore, although there was conflicting evidence regarding whether this information was actually supplied to Merrill Lynch, there is evidence in the record which supports the trial court's finding that it was not. Therefore, we will not disturb this finding on appeal. See People in Interest of M.S.H., 656 P.2d 1294 (Colo.1983).


Defendants also contend that the trial court erred in determining the value of the "land swap" asset to LPI, and in determining the effect this asset had upon the fair market value of LPI stock. Essentially, defendants argue (1) that there was insufficient evidence in the record to support the trial court's conclusion that the land swap would actually occur and (2) that the trial court erred in awarding RMC damages based upon the intrinsic value of the land, rather than the effect it had upon LPI's stock value. Again, we disagree.

A local Forest Service representative testified that the Forest Service had signed a letter of intent to proceed with the "swap" and that there was an agreement in principle between LPI and the Forest Service that the swap would occur. In addition, the evidence showed that LPI had spent almost $500,000 in obtaining the option rights to the private land, in hope that the swap would occur. From this evidence, the trial court found that this "opportunity" was a valuable asset to LPI and that there was a high probability the swap would occur. Because these findings have support in the record, we...

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