Settles v. Leslie

• Decision Date: 06 November 1998
• Docket Number: No. 49A04-9711-CV-468,49A04-9711-CV-468
• Citation: 701 N.E.2d 849
• Parties: Patricia SETTLES, William Freeland, Mark Freeland, and David Freeland, Appellants-Plaintiffs, v. Ted Z. LESLIE, John L. Rainey, Wayne L. Seagren, Patricia G. Rainey, Joyce Seagren and Mi-Tech Metals, Inc., An Indiana Corporation Appellees-Defendants.
• Court: Indiana Appellate Court

Page 849

701 N.E.2d 849

Patricia SETTLES, William Freeland, Mark Freeland, and David Freeland, Appellants-Plaintiffs, v. Ted Z. LESLIE, John L. Rainey, Wayne L. Seagren, Patricia G Rainey, Joyce Seagren and Mi-Tech Metals, Inc., An Indiana Corporation Appellees-Defendants.

No. 49A04-9711-CV-468

Court of Appeals of Indiana.

Nov. 6, 1998.

Edward E. Brown, Edward Brown & Associates Indianapolis, for Appellants.

John M. Stuckey, Stuart & Branigin, Lafayette, for Appellees.

OPINION

SULLIVAN, Judge.

Appellants Patricia Settles, William Freeland, Mark Freeland and David Freeland (collectively Freeland Plaintiffs) appeal the trial court's order granting summary judgment in favor of the Appellees, Ted Z. Leslie, John L. Rainey, Wayne L. Seagren, Patricia G. Rainey, Joyce Seagren (collectively Majority Shareholders) and Mi-Tech Metals, Incorporated (Mi-Tech).

The Freeland Plaintiffs present one issue on appeal, which we rephrase as follows: whether Indiana's Dissenters' Rights Statute ¹ provides the exclusive remedy for minority shareholders of a closely held corporation claiming breach of fiduciary duty by the corporation's majority shareholders, who allegedly missappropriated corporate funds by (1) overcompensating themselves, (2) failing to pay dividends, and (3) receiving excessive compensation for employment contracts and non-competition agreements in connection with a corporate merger.

We affirm.

Mi-Tech was incorporated in 1978. The corporation's original shareholders consisted of Ted Leslie, John Rainey, Wayne Seagren and Thomas Dugger. Ted Leslie initially owned twenty-seven shares of Mi-Tech stock, while the others each owned twenty-four shares. Mi-Tech engaged in the making and selling of high-density metal products and electrical contacts produced from powdered metals. In 1979, Mi-Tech hired William "Ed" Freeland (Ed Freeland), who served as the corporation's manufacturing manager. Shortly thereafter, Ed Freeland acquired four shares of Mi-Tech's common stock. At the time he was hired, Ed Freeland was forty-one years old; the remaining shareholders were in their fifties and sixties. Thomas Dugger retired in 1982. The following year, Ed Freeland was selected to replace Thomas Dugger on Mi-Tech's board of directors. Ed Freeland served on the board of directors until his death in April of 1989. In October of 1983, the board resolved to have its accounting firm develop an incentive bonus plan for corporate officers; the plan was not intended to compensate shareholders.

In January of 1984, Ed Freeland and Tom Dugger executed a stock purchase agreement, in which Ed Freeland agreed to buy Tom Dugger's twenty-four shares of Mi-Tech stock for $19,999.92 ($833.33 per share). The agreeement called for Ed Freeland to pay $2000.00 up front, with the balance due in ninety equal monthly installments of $304.25. The agreement further provided that Tom Dugger, the "Seller," would "retain all such shares ... until they are fully paid for, and Seller shall retain full voting rights attributable to said shares of stock.... Any dividends earned or received shall be the sole property of the Seller until the shares are actually transferred and issued" to Ed Freeland. Record at 245.

Ed Freeland was murdered in April of 1989. At the time of his death, Ed Freeland had not completed his monthly installment obligation under the stock purchase agreement. The Freeland Plaintiffs became tenants in common of Ed Freeland's interests in twenty-eight shares of Mi-Tech stock, obtaining full ownership rights in the shares upon paying the entire purchase price to Thomas Dugger sometime in 1989.

In September of 1989, Mi-Tech's board of directors met to review the corporation's position as a result of Ed Freeland's death. The board concluded, "that Ed Freeland's tragic death caused Mi-Tech to be extremely vulnerable as related to metallurgy and age of the owner-managers." Record at 361. Therefore, the board decided to investigate selling the business. Between September of 1989 and February of 1992, the board of directors negotiated with two corporations for the purchase of Mi-Tech, but no sale was ever consummated. The Freeland Plaintiffs did not object to these proposed transactions.

In the Fall of 1991, the Internal Revenue Service (IRS) contacted Mi-Tech regarding proposed adjustments to Mi-Tech's tax returns for fiscal years 1988, 1989 and 1990. Among other allegations, the IRS argued that Mi-Tech's incentive bonus plan resulted in excessive compensation for Mi-Tech's officers including Ed Freeland. Mi-Tech contested each allegation. Ultimately, the dispute was resolved through a negotiated settlement. In the settlement, Mi-Tech acknowledged income tax deficiencies totalling $71,802.00 from the three years in dispute. The IRS conducted subsequent audits of Mi-Tech's returns in 1991 and 1992, but the agency proposed no further adjustments. During this period, Mi-Tech continued to compensate its officers pursuant to the incentive bonus plan.

In the Summer of 1994, Mi-Tech successfully negotiated the merger of Mi-Tech with another company, Birco, Incorporated (Birco). Under the Plan of Merger, Mi-Tech was the surviving corporation. The plan called for Mi-Tech's outstanding common stock to be converted into cash and Birco's common stock, in turn, to be converted into new shares of Mi-Tech common stock. On September 2, 1994, counsel for the Freeland Plaintiffs received notification of a Special Meeting of Shareholders, scheduled for September 12, 1994, and called for the purpose of considering the proposed merger. On September 9, 1994, the Freeland Plaintiffs filed a Complaint for Accounting, which also requested a temporary restraining order to prevent Mi-Tech's directors from voting on the planned merger. The temporary restraining order was denied on September 12, 1994, and the special meeting proceeded. At this shareholder's meeting, Plaintiff Patricia Settles, along with counsel for the Freeland Plaintiffs, conveyed a written Notice of Dissent to the shareholders regarding the proposed merger. The dissent stated, in part:

"Notice is hereby given that [the Freeland Plaintiffs] ... express and state their dissent with the proposed Plan of Merger of Mi-Tech Metals, Inc. with Birco, Inc.

1. That [the Freeland Plaintiffs] are shareholders entitled to vote on the proposed merger.

2. That it is the intent of [the Freeland Plaintiffs] to demand payment for their shareholders shares if the proposed action is effectuated.

3. That [the Freeland Plaintiffs] further intend to retain all other rights of a shareholder, and further they are willing to deposit the shareholders share certificate[s] as the corporation may require.

4. The dissenters further hereby notify the corporation that the dissenters' own estimate of the fair value of the dissenters' shares is the sum of $19,018.40 per share." Record at 241.

The merger proposal was adopted. Subsequently, on or about September 21, 1994, Mi-Tech mailed to each of the Freeland Plaintiffs a Notice of Dissenters' Rights. The Notice provided that, if the Freeland Plaintiffs elected to demand payment pursuant to Indiana's Dissenters' Rights (IDR) statute, Chapter 44 of the Indiana Business Corporation Law, ² they should forward a payment demand on the form provided. Further, the Notice indicated that any demand must be recieved not later than sixty days from the date on the Notice and that the dissenters' Mi-Tech share certificates must be deposited with Allan Bir, President of Mi-Tech Metals, Inc. Mi-Tech offered to exchange the Freeland Plaintiffs' shares for $14,000 per share. The Freeland Plaintiffs read the Notice of Dissenters' Rights and consulted their counsel regarding the document. However, they failed to timely submit a demand payment or deposit their share certificates pursuant to Mi-Tech's instructions. The Freeland Plaintiffs also ignored follow-up correspondence by Mi-Tech advising them to deposit their share certificates.

Responding to the Complaint against them, the Majority Shareholders and Mi-Tech claimed in their Answer, filed September 20, 1994, that the Freeland Plaintiffs' exclusive remedy was the IDR statute. On July 17, 1995, the trial court dismissed two counts of the Complaint. The Freeland Plaintiffs filed an Amended Complaint on April 12, 1996, asserting claims both individually ³ and derivatively that the Majority Shareholders fraudulently converted corporate funds and breached their fiduciary duty to both the corporation and to the Freeland Plaintiffs. On May 1, 1996, the Majority Shareholders and Mi-Tech filed an Answer to Amended Complaint. Thereafter, on October 15, 1996, the Majority Shareholders and Mi-Tech filed a Motion for Summary Judgment, together with a memorandum supporting the motion. After the Freeland Plaintiffs requested a rescheduling, a hearing on the summary judgment motion was eventually set for and argued before the trial court on May 5, 1997. On that date, counsel for the Freeland Plaintiffs filed an Affidavit, signed by each Plaintiff, and an Affidavit of Expert Witness, demonstrating alleged material issues of fact. ⁴ On July 11, 1997, the trial court, without explanation or elaboration, granted the summary judgment motion as to all of Plaintiffs' claims, including any claims of alleged unpaid dividends.

Summary judgment is appropriate only where no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C); DRW Builders, Inc. v. Richardson (1997) Ind.App., 679 N.E.2d 902, 905, reh'g denied. Genuine issues of material fact exist where facts concerning an issue which would dispose of the litigation are in dispute. General Motors Corp. v. Northrop Corp. (1997) Ind.App., 685 N.E.2d 127, 132, trans. denied. The moving party first has the burden to demonstrate the absence of a material fact. Abbott v. Bates (1996) Ind.App., 670 N.E.2d 916, 921, reh'g denied. Once the...