Singer v. Dungan
| Decision Date | 23 January 1995 |
| Docket Number | No. 94-1467,94-1467 |
| Citation | 45 F.3d 823 |
| Parties | Norman P. SINGER, Plaintiff-Appellee, v. Thomas F. DUNGAN; Benjamin Flammey; The Cambridge Institute, Incorporated, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Deborah Brand Baum, Shaw, Pittman, Potts & Trowbridge, Washington, DC, for appellants. Edward C. Sussman, Washington, DC, for appellee.
Before RUSSELL, WILKINS, and HAMILTON, Circuit Judges.
Reversed by published opinion. Judge HAMILTON wrote the opinion, in which Judge RUSSELL and Judge WILKINS joined.
Norman Singer (Singer) instituted suit against Thomas Dungan (Dungan) and Benjamin Flammey (Flammey) for common law fraud and breach of fiduciary duty and against the Cambridge Institute (CI) (collectively, Appellants) for breach of contract. A jury returned a verdict in favor of Dungan and Flammey on the fraud claim, but in favor of Singer on the breach of fiduciary duty claim. The jury also found in favor of Singer on the breach of contract claim. We reverse and render judgment in favor of the Appellants.
Singer's profession was creating and conducting seminars for a seminar company. Dungan and Flammey wanted to start a seminar business and solicited Singer's help in order to start their own enterprise. Their efforts gave rise to CI, which was incorporated on December 31, 1984, under the following material terms: Dungan was to make an initial contribution of capital in return for sixty percent of CI's stock, and Flammey was to receive twenty-five percent of the stock from Dungan for being the bookkeeper. Singer, who could work only part-time initially, was to contribute his skills and receive fifteen percent of the stock, to be increased to twenty-five percent, the ten percent coming from Dungan's shares, when he started working for the company full-time. Singer was to contribute no capital, but material to his decision to join the enterprise was that Dungan should make a sufficient initial contribution of capital.
Singer was president of CI and developed and produced the seminars. Flammey was the bookkeeper, and Dungan had little involvement in daily affairs. All three men constituted the board of directors. Singer signed CI checks and was provided financial statements for review, but he did not monitor the financial condition of CI, nor did he prepare financial statements or tax returns. The record reveals that while Singer was not involved in preparing CI's financial records, he never believed that Dungan and Flammey tried to hide the records from him. Singer's tenure as president of CI was rocky; he admitted that he "resigned" several times, but that his "resignations" lasted anywhere from five minutes to a half a day, but he never missed work because of them.
Unlike Dungan and Flammey, Singer received a yearly salary of $48,000 for his part-time work. Additionally, even if Singer left CI, he was entitled to receive a payment of fifty percent of the "gross profits" of CI up through the date of his departure. If CI experienced "gross profits," then Singer's bonus would include any profits on the programs that had been planned, prepared, and scheduled prior to his departure. The term "gross profits" was defined in Singer's employment contract as "accrued revenue and accrued expenses for any given period of time and is a sum prior to payment of either Federal or State corporate income taxes, prior to Mr. Singer's earned profit allocation." (J.A. 831). Of the approximately 200 seminars conducted in 1989 and 1990, Singer prepared all but two. In 1989, Singer renewed his employment with CI.
Turning to CI's financial condition, during 1986 CI, being a relatively new corporation, made no money. By 1987, however, it began to show a profit, and Singer began teaching Dungan and Flammey the seminar business. Despite past prosperity, by March of 1989, CI was experiencing financial straits. On March 14, 1989, a board of directors meeting was called to resolve CI's financial problems: Singer, Dungan, and Flammey agreed that CI was having financial setbacks, but they could not agree on a solution to this problem. While Singer remained a director of CI, on March 17, 1989, Singer tendered his resignation as president of CI, and it became effective on May 31, 1989.
Meanwhile, CI continued to experience financial difficulty. Accordingly, Dungan and Flammey scheduled another board meeting for July 6, 1989. Singer was out of town, but was notified by Dungan that a meeting was being convened. Dungan informed Singer that CI was "experiencing a severe hemorrhaging of capital," that it had sustained losses in May, and that losses were predicted for June. (J.A. 853). Dungan further stated that the directors needed to resolve CI's financial problems. Singer did not attend the July 6 meeting, claiming short notice, so it was convened without him. At the meeting, Flammey represented that CI had lost $45,000 since the end of 1988, that $180,000 of capital was required to keep CI afloat, and that the directors decided to raise these funds by offering for sale on a pro rata basis to existing stockholders (Singer, Dungan, and Flammey) additional stock at $10 per share. Thus, to achieve $180,000, 18,000 shares would have to be sold and issued. Each stockholder was given the option to maintain his percentage interest consistent with his existing rights. Dungan was offered 9,000 shares of which he purchased 4,000, and Flammey purchased all of the 4,500 shares offered to him.
Minutes of the July 6, 1989 meeting were sent to Singer by certified mail, along with the option to purchase the stock. Given the bleak financial picture that Dungan and Flammey presented of CI, Singer declined to purchase any stock and made his intentions known in a letter to Flammey dated July 18, 1989. Singer recognized that his equity ownership in CI would "ostensibly get[ ] reduced to just about zero" (J.A. 858) by virtue of the new stock issuance. Subsequently, in September or October of 1989, Singer discovered that Dungan and Flammey had purchased only $85,000 worth of stock. This discovery had two effects on Singer. First, he concluded that the financial health of CI was not as bleak as represented because it needed less capital than represented. Second, Singer's stock had been diluted from twenty-five percent to less than one percent because Singer did not partake in the issuance. Singer testified that had he known that only $85,000 had been put in the company, he might have contributed capital to ensure that his interest was maintained, explaining that if a substantially smaller sum of money was required to keep CI afloat, he might have reacted differently by investing money in the company and thereby have maintained his interest in CI.
Unhappy with this turn of events, Singer, on August 15, 1991, instituted suit against the Appellants, asserting three claims: (1) common law fraud against Dungan and Flammey; (2) breach of fiduciary duty against Dungan and Flammey; and (3) breach of contract against CI. The Appellants generally denied the substantive allegations in their answer; also, they generally raised the defense of the statute of limitations with respect to each claim in their answer.
Subsequently, the Appellants unsuccessfully moved to dismiss the complaint under Rule 12(b)(6) with respect to the fraud and breach of fiduciary duty claims. Next, the Appellants unsuccessfully moved to dismiss the fraud and breach of contract claims based on the statute of limitations. This second dismissal motion did not raise the issue of the statute of limitations defense with respect to the breach of fiduciary duty claim, but, as stated, this defense was generally raised as to all claims in the answer. The district court denied these motions, and the case proceeded to trial.
Regarding the breach of contract claim, at trial Singer attempted to introduce evidence explaining that the term "gross profits" had an industry definition that did not include overhead expenses. The district court excluded this proffered testimony because the term was defined clearly in the employment contract, but the district court permitted Singer to introduce testimony of financial experts for the limited purpose of revealing how accountants use the term "gross profits" in connection with stock-dilution claims based on a company's financial value. Singer's experts testified that CI's financial statements showed $145,000 available cash, but that this amount was subsequently reduced, that a transfer of $190,000 from CI to another company owned by Dungan did not appear on any of the financial statements provided by the Appellants, that CI's tax returns showed lower profitability than its financial statements, that CI had an estimated value of $600,000 to $1,000,000, and that Singer's twenty-five percent share of CI was estimated to be worth $250,000. The crux of Singer's experts' testimony tended to show that CI was not in the financial straits that the Appellants represented based on their methods of calculation for valuation of stock dilution.
Conversely, the Appellants' evidence established that CI was in weak financial condition in 1989-90. For example, CI's tax returns and profit-and-loss statements demonstrated that CI suffered losses for 1989-90 and was operating at a loss. Specifically with respect to gross profits, the evidence established that there were no gross profits based on the definition of this term in Singer's employment agreement. According to the Appellants, "gross profits" as defined in Singer's employment agreement was a distinctly different concept from "gross profits" as that term is used in other accounting contexts.
Regarding the breach of fiduciary duty claim, Singer testified that Dungan tried to buy out Singer's stock in CI initially for $10,000 then $100,000, but nothing ever came of these proposals, and that later...
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