Smith v. Roger Smith & Sons, Inc.
| Decision Date | 08 June 2012 |
| Docket Number | No. 105,456.,105,456. |
| Citation | 277 P.3d 1193 |
| Court | Kansas Court of Appeals |
| Parties | Brent E. SMITH, Appellant, v. ROGER SMITH & SONS, INC., et al., Appellees. |
OPINION TEXT STARTS HERE
Appeal from Johnson District Court; Gerald T. Elliott, Judge.
Thomas V. Bender and Eric M. Shimamoto, of Walters Bender Strohbehn & Vaughan, P.C., of Kansas City, Missouri, for appellant.
John M. McFarland and Eric S. Johnson, of Kutak Rock LLP, of Kansas City, Missouri, for appellees.
Before McANANY, P.J., LEBEN and ATCHESON, JJ.
This case arises out of the sale of a car dealership that prompted one of the shareholders in the company to sue the other two shareholders on the grounds they structured the transaction to impermissibly benefit themselves to his detriment and that of the corporation. The dispute is also an intrafamilial one—Plaintiff Brent Smith, the discontented shareholder, accused his brother Craig and his father Roger of trying to cheat him by depressing the value of the corporation while reaping personal financial benefits from the sale. The Johnson County District Court dismissed Brent's petition and amended petition for failing to state claims for relief. Those rulings were erroneous. And we find other arguments Defendant Craig Smith has advanced as alternative bases for affirming the dismissal to be unavailing. The judgment is reversed, and the case is remanded for further proceedings.
Defendant Roger Smith established the Toyota dealership and set up Roger Smith & Sons, Inc. as the corporate owner of the enterprise. During the time relevant to this action, Roger owned 59 percent of the stock in the corporation. Brent and Craig each owned 20.5 percent of the stock. In his action, Brent has named the corporation as a nominal defendant, although he has never sought relief from the company. The lawyers jointly representing Roger and Craig have included the corporation as an additional defendant in their pleadings, motions, and other papers.
Because the district court dismissed Brent's petition and his amended petition for failing to state claims against Craig (and nominally the corporation) as provided in K.S.A.2011 Supp. 60–212(b)(6), we review the sufficiency of the allegations in those pleadings. As we explain later, Roger was dismissed from the suit for other reasons. The applicable standard of review is a forgiving one. The appellate court assumes the truth of the factual allegations in the petition, along with any inferences that might be reasonably drawn from those allegations. The reviewing court then asks whether those allegations and inferences, if proven, would allow a jury to find for the plaintiff under some legal theory. Jones v. State, 279 Kan. 364, 366, 109 P.3d 1166 (2005). Liberal construction of a petition is the rule, and the assertion of a precise cause of action is not required. Fowler v. Criticare Home Health Services, Inc., 27 Kan.App.2d 869, 874, 10 P.3d 8 (2000), aff'd271 Kan. 715, 26 P.3d 69 (2001). “It is not necessary to spell out a legal theory of relief so long as an opponent is apprised of the facts that entitle plaintiff to relief.” Oiler v. Kincheloe's, Inc., 235 Kan. 440, 447, 681 P.2d 630 (1984). The standard in ruling on a motion to dismiss involves no weighing of evidence or credibility determinations. The sufficiency of the pleading presents a question of law the appellate courts review anew and without deference to the district court ruling. In keeping with the required standard of review, we draw the facts from Brent's pleadings and necessarily rely on that rendition, although it represents only one side of the story.
Both the petition and the amended petition describe the corporation as selling new and used cars and operating an automotive repair and maintenance department. Brent was the vice president and general manager of the corporation “until he was terminated in June 2003.” Following his termination, Brent remained a shareholder but received no compensation, dividends, or other payments from the corporation. Roger and Craig were the other officers and shareholders of the corporation. They apparently were actively involved in running the dealership.
In March 2008, Brent reviewed “partial financial statements” and other corporate records and determined: Roger and Craig received what appeared to be excessive compensation; the corporation purportedly owed the two more than $1 million as evidenced by promissory notes payable to them; and the vehicle inventory did not match what was on the lot. Two months later, Brent received notice of a shareholders' meeting to consider an asset purchase agreement for the corporation. Brent had periodically asked if the dealership were up for sale and was always told no. In reviewing the purchase proposal, Brent concluded the sale price was “below market value” and was less than past offers to buy the business.
On May 23, 2008, a lawyer representing Brent delivered a letter to counsel for the corporation outlining concerns and objections to the proposed sale. The letter requested action from the shareholders to address those issues. Five days later, corporate counsel responded in a letter stating no action would be taken to modify the proposed terms of the sale. On May 30, Craig and Roger, as the majority shareholders, approved the sale of the corporation.
Brent objected to the proposed sale terms because the buyer would: (1) pay to Craig and Roger personally $400,000 each for noncompete agreements; (2) supply Craig and Roger and their spouses with vehicles for 5 years; and (3) provide health insurance for Craig and Roger and their spouses. Brent also questioned an arrangement under which the buyer leased the dealership's real property for 5 years. And he disputed the accuracy of the vehicle inventory sold as part of the transaction. According to Brent, all of those provisions improperly decreased the amount paid for the corporation itself, thereby harming the corporation and him as a shareholder. He also submitted that excessive compensation to Roger and Craig in the years immediately before the sale improperly diminished the value of the corporation because some of that money should have been reinvested in the business.
Brent filed suit in Johnson County District Court on June 5, 2008, against the corporation, Roger, and Craig alleging a breach of fiduciary duty. In March 2009, Roger died. In July 2009, the district court granted Brent's motion to amend the petition to substitute the representative of Roger's estate. But Brent did not file an amended petition for that purpose.
What followed was a flurry of motion practice from the defendants that we summarize here. The district court granted a motion to dismiss Roger from the suit because he was no longer a real party in interest. And the district court determined that Brent had waited too long to assert a claim against Roger's estate. That particular ruling is not before this court. The district court ruled that the breach of fiduciary duty Brent asserted against Craig in the petition should have been brought as a shareholder derivative claim on behalf of the corporation under K.S.A. 60–223a. The district court, therefore, dismissed the petition against Craig but granted Brent leave to file an amended petition containing a derivative claim. Brent did so, naming the corporation and Craig as defendants. The district court later granted defendants' motion to dismiss the amended petition. The journal entry does not state the reason for dismissal. In ruling at the hearing on the motion, the district court dismissed the amended petition on the ground that Brent's claim was a personal one “clearly articulated to be among family members, and that is not a derivative one” meant “to enforce a right of the corporation.”
Brent has timely appealed. He argues that he should have been allowed to go forward with the direct action asserted in the petition and the shareholder derivative action asserted in the amended petition. We agree that Brent sufficiently pled both types of claims and should be permitted to continue his suit on those theories. We, of course, offer no opinion on their merits.
Roger and Craig, as officers and directors of the corporation, owed a fiduciary duty to the corporation and its shareholders. See Becker v. Knoll, 291 Kan. 204, 208, 239 P.3d 830 (2010); Newton v. Hornblower, Inc., 224 Kan. 506, 514, 582 Kan. 1136 (1978); Richards v. Bryan, 19 Kan.App.2d 950, Syl. ¶ 5, 879 P.2d 638 (1994) (). A fiduciary generally must act with fairness and in good faith toward the person to whom the obligation is owed and may not convert opportunities or circumstances to his or her own financial advantage at the expense of that person. See Becker, 291 Kan. at 208;Goben v. Barry, 234 Kan. 721, 728, 676 P.2d 90 (1984). The sort of actions Brent imputed to Roger and Craig in the pleadings, if proven, likely would amount to fiduciary breaches, and nobody argues otherwise as a basis to uphold the dismissal.
The allegations outline economic harm to the corporation depressing its value and the resulting price realized upon its sale. In turn, that harm would adversely affect the shareholders because the worth of their interest in the corporation relates directly to its value. Those corporate injuries typically must be redressed in a shareholder derivative action brought on behalf of the corporation against the malfeasant officers or directors. Lightner v. Lightner, 46 Kan.App.2d 540, Syl. ¶¶ 2, 4, 266 P.3d 539 (2011). As those claims have been pled, Brent suffered no distinct financial loss apart from his status as a shareholder. Nor did he suffer an enhanced injury disproportionate to his holdings in the corporation. That is, the...
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