Roper v. Dynamique Concepts, Inc.

• Decision Date: 10 May 1994
• Docket Number: No. 2202,2202
• Citation: 447 S.E.2d 218,316 S.C. 131
• Parties: Benny R. ROPER, Deane McKinley, Ed Revis and Sandy Tucker, Appellants, v. DYNAMIQUE CONCEPTS, INC., Keith R. Cossairt, Herbert W. Mitchum, Graydon F. Vadas, Robert H. Rhames, H.A. Kallio, J. Brent Holcomb, CSX Corporation, Inc., Edward Wovas and Roger Posey, Respondents. . Heard
• Court: South Carolina Court of Appeals

Page 218

447 S.E.2d 218

316 S.C. 131

Benny R. ROPER, Deane McKinley, Ed Revis and Sandy Tucker, Appellants, v. DYNAMIQUE CONCEPTS, INC., Keith R. Cossairt, Herbert W Mitchum, Graydon F. Vadas, Robert H. Rhames, H.A Kallio, J. Brent Holcomb, CSX Corporation, Inc., Edward Wovas and Roger Posey, Respondents.

No. 2202.

Court of Appeals of South Carolina.

Heard May 10, 1994.

Decided July 18, 1994.

Rehearing Denied Aug. 31, 1994.

Certiorari Denied May 5, 1995.

Robert C. Wilson, Jr., Greenville, for appellants.

Julianne Farnsworth and Leslie S. Rogers, McNair & Sanford, Columbia, and James A. Bell, St. George, for respondents.

CURETON, Judge.

Benny R. Roper, Deane McKinley, Ed Revis, and Sandy Tucker, minority shareholders in Dynamique Concepts, Inc. (DCI), brought an action seeking injunctive relief, a judicial dissolution, and damages against DCI and the majority shareholders, Keith Cossairt, Herbert W. Mitchum, Graydon F. Vadas, Robert H. Rhames, H.A. Kalio, and J. Brent Holcomb, as well as principals of CSX Corporation, Inc., Edward Wovas and Roger Posey (respondents), for alleged oppressive and illegal activities, breach of fiduciary duties, and violation of the Racketeer Influenced and Corrupt Organizations (RICO) statute. The respondents counterclaimed for intentional interference with prospective contractual relations, violations of Securities Exchange Act of 1934, civil conspiracy, fraud and corporate waste. They also sought an accounting. ¹ The trial court directed a verdict in favor of the respondents on the RICO claims and directed a verdict in favor of the minority shareholders on the counterclaims. The court also conducted an accounting, and denied the minority shareholders' request for judicial dissolution. The minority shareholders appeal. We affirm.

DCI was formed in May 1991 to develop and market a revolutionary type of pump ² invented by Keith Cossairt. In the early part of 1990, Cossairt contacted Deane McKinley, a stockbroker, concerning the patent which was pending for the pump and sought assistance in obtaining investors to develop and market the pump. McKinley in turn formed a group which included himself, Ed Revis, a banker, and Benny Roper, a technician. Revis and McKinley were each issued 100 shares, and Roper 50 shares of stock in DCI in exchange for future services to be rendered to the corporation. At this point, Cossairt held 598 shares of stock in DCI. According to McKinley, Cossairt represented he, Revis and Roper would each receive ten percent ownership of the company, while Cossairt would retain seventy percent. The other appellant, Sandy Tucker, was hired as an engineering employee of the corporation on June 1, 1991. As a result of her employment with DCI, she was issued 40 shares of stock.

The initial goal of DCI was to develop and test the pump and, eventually, to market it. In an attempt to generate interest in the pump, Cossairt contacted Roger Posey, a CSX Corporation official. After seeing a demonstration of the pump, Posey expressed interest in the pump's potential. Posey introduced Graydon Vadas to the corporation as a potential investor and/or employee who could assist DCI in developing its product. Vadas was hired to be the president of DCI, and was issued 50 shares of stock. After Vadas was named President and Chief Operating Officer of DCI, McKinley was named Vice-President of Marketing as well as Secretary-Treasurer; Revis was elected Vice-President of Finance; and Cossairt became Chairman of the Board.

The remaining investors in DCI were cash investors and received stock in exchange for their cash contributions. Robert Rhames, a client of McKinley, and Phil Suddeth, a friend of Revis, were the initial cash investors in the corporation. Rhames contributed $50,000 in exchange for ten shares or one percent of the company. Suddeth also invested cash, but later withdrew from his investor agreement. In July 1991, H.A. Kallio, J. Brent Holcomb, and Hubert W. Mitchum, friends of Rhames, were contacted about investing in the corporation. Kallio and Holcomb each invested $10,000 in the corporation and received 5 shares each. Mitchum invested $20,000 for 10 shares.

Demonstrations of the pump were given to several different companies in an attempt to obtain capital investment to fund the research, development and marketing of the pump. DCI received some promising feedback for applications for the pump ranging from toilets, to dry cleaning, to cement, to furniture manufacturing. However, other than the capital provided by the cash investors, the only funds generated were $9,500 which CSX agreed to pay for a pump prototype to be built. Consequently, Vadas wanted DCI to focus on the plastic pellet removal application for CSX because CSX was big enough to protect the technology and serve as a "big brother" to DCI.

The minority shareholders ultimately became concerned that Vadas's sole focus on CSX was not productive. They also became concerned that Vadas was improperly spending corporate money in an attempt to secure a CSX contract. Furthermore, they were concerned about a $10,000 personal loan from Vadas to Posey, a CSX employee, who began to pay back the loan only after litigation began. The minority shareholders also claimed Vadas gave a $2,500 check to Spera, another CSX employee. Spera refuted this claim, testifying that Mitchum sent him a check for $2,500 for reimbursement for work done on a DCI project, but after discussing it with his supervisor, he sent the check back to DCI.

At one point, McKinley recalled Vadas claiming DCI had a contract with CSX. Cossairt also believed a contract existed at one time. According to Posey, however, there never was an agreement between CSX and DCI. Without any incoming funds, by the middle of September 1991, the economic forecast for DCI was bleak. On September 16, 1991, the corporation held a shareholders meeting and Revis reported that DCI would be out of funds by the end of the month. At the meeting, several solutions were suggested to solve the financial dilemma. The proposed solutions involved shareholders contributing funding equal to the percentage of their ownership in the corporation or pledging some of their shares to the corporation for sale. Most of the shareholders agreed to contribute either money or shares, a couple of the shareholders were undecided, and McKinley refused to contribute anything. After further discussion, the meeting became heated and eventually adjourned with the shareholders unable to agree to a resolution of the financial crisis.

By early October 1991, the company had exhausted all of its financial resources, accounts payable exceeded $35,000 and DCI was on the verge of bankruptcy. Furthermore, Cossairt was personally on the brink of bankruptcy. Creditors were calling regarding overdue bills, the corporation was being evicted from its place of business, and creditors were threatening to place a lien on the pump.

Because of his bleak financial situation, Cossairt negotiated with Mitchum to sell 500 shares of Cossairt's stock for $50,000. As additional consideration for the stock, Mitchum promised to obtain or loan money for the corporation to pay off its bills. According to Mitchum, his specific representation to Cossairt was that he would pursue contracts, diversify the company, and get some stock issues so as to attract "investors with some money that could really get things to going." Simultaneously, Mitchum arranged for a licensing agreement between the company and Cossairt. Mitchum then paid a number of DCI's outstanding bills. After purchasing the 500 shares from Cossairt, Mitchum owned fifty-one percent of the corporation's shares. Mitchum then sold some of the shares he had purchased from Cossairt to Rhames and Vadas, retaining 210 shares.

A shareholders meeting was called for November 6, 1991, and all the shareholders except Sandy Tucker were present. Two different plans were proposed at the meeting, both of which involved the issuance of additional shares of stock to raise working capital for the corporation. Under Plan A, the company would rearrange its stock, devaluing the existing shares. Under Plan B, the company would sell an additional 19,000 shares at $10 per share, with first option to purchase going to existing shareholders. This plan included preemptive rights enabling all existing shareholders to purchase additional shares at $10 per share on a pro rata basis. Mitchum explained he and others anticipated needing $850,000 to $900,000 to run the company for the next year. McKinley, Roper and Revis refused to go along with either proposal, and left the meeting. The remaining shareholders passed Plan B. Following the meeting, registered letters were sent to the minority shareholders informing them that Plan B had been approved, and that they had until November 18, 1991 to exercise their preemptive rights to purchase additional shares pursuant to the plan. None of the minority shareholders exercised their preemptive rights, and, instead, on November 20, 1991, filed this lawsuit.

Although various causes of action were pleaded by the minority shareholders, the essence of their complaint is that the majority shareholders' conduct in voting to issue 19,000 additional shares of stock was designed to dilute the minority shareholders' interest in the company and squeeze them out of the corporation. The majority shareholders answered the complaint denying that the purpose of the stock issue was to dilute the minority shareholders' interest and asserted the stock issue was necessary to save the corporation from insolvency.

The minority shareholders initially hired Hal Warlick to represent them, but subsequently substituted current counsel. The case was tried November 30, 1992 and December 1, 1992. The trial judge issued his final order March 1, 1993, and modified it on March 19, 1993. In the interim, the judge conducted a hearing on January 8, 1993 on a motion to dismiss...