Straight v. Goss

• Decision Date: 16 April 2009
• Docket Number: No. 4532.,4532.
• Citation: 678 S.E.2d 443,383 S.C. 180
• Court: South Carolina Court of Appeals
• Parties: David K. STRAIGHT, Appellant, v. Michael H. GOSS, Pamela W. Goss, Timberline Building Systems, Inc., Allied Products and Services, LLC, Custom Built Trusses, Inc., Commerce Properties, LLC., and Structural Component Systems, Inc., Respondents. Timberline Building Systems, Inc., Michael H. Goss, and Pamela W. Goss, Third-Party Plaintiffs v. Eagle's Nest Homes, Inc., Third-Party Defendants.

678 S.E.2d 443

383 S.C. 180

David K. STRAIGHT, Appellant, v. Michael H. GOSS, Pamela W. Goss, Timberline Building Systems, Inc., Allied Products and Services, LLC, Custom Built Trusses, Inc., Commerce Properties, LLC., and Structural Component Systems, Inc., Respondents.

Timberline Building Systems, Inc., Michael H. Goss, and Pamela W. Goss, Third-Party Plaintiffs v. Eagle's Nest Homes, Inc., Third-Party Defendants.

No. 4532.

Court of Appeals of South Carolina.

Heard March 3, 2009.

Decided April 16, 2009.

Robert L. Buchanan, Jr., of Aiken, for Appellant.

Everett A. Kendall, II, of Columbia, for Respondents.

HUFF, J.:

In this shareholder derivative action, David K. Straight appeals from an order of the special referee finding largely in favor of Michael H. Goss (Goss) and his wife, Pamela W. Goss (Pam). In particular, Straight appeals the referee's findings relating to his claims the Gosses, as directors of Timberline Building Systems, Inc. (Timberline), (1) received excess wages in the nature of salary overrides; (2) misappropriated a corporate opportunity by purchasing property the Gosses then leased to Timberline, which the Gosses thereafter conveyed to their corporation, Commerce Properties, LLC (Commerce Properties), and caused Timberline to pay rent to cover the Gosses' taxes and mortgage on the property and also pay the rent of the Gosses' truss company; (3) misappropriated a corporate opportunity by creating a truss company, Custom Built Trusses, Inc. (CBT), which ultimately was succeeded by the Gosses' company Structural Component Systems, Inc., and used Timberline employees and materials for the benefit of the truss company; and (4) made inappropriate distributions to themselves through another of the Gosses' companies, Allied Products and Services, LLC (Allied). We affirm.

FACTUAL/PROCEDURAL HISTORY

In 1983, Straight, along with Larry Gandolfi and another person, formed Eagle's Nest Homes, Inc. (Eagle's Nest), a company that distributes panelized buildings through independent representatives. In the spring of 1983, Straight and Gandolfi were searching for a multi-sided house to market and found that a business called Deltec Homes produced a multi-sided, round house. Straight called Deltec and made an appointment with Goss, Deltec's marketing manager.¹ Eagle's Nest purchased panelized houses from Deltec for approximately one year and thereafter purchased the round houses from Kingsberry Homes, a company for which Goss had previously worked and to which Goss had returned. Thereafter, Straight, Gandolfi, and Goss began exploring the possibility of starting a new company to manufacture panelized houses for Eagle's Nest.

In January 1986, Goss prepared a prospectus for a company called Timberline Manufacturing, Inc. On February 28, 1986, Straight, Gandolfi, and Goss signed a letter of intent, setting forth the parties' agreement in regard to the formation of the company. In particular, the letter of intent provided the company would be devoted exclusively to the production and delivery of Eagle's Nest homes, with other businesses and products added as warranted from retained earnings. It further stated Eagle's Nest homes would be purchased exclusively from the company, provided that pricing and delivery terms were competitive. The letter of intent also placed responsibility of day-to-day management of the company on Goss as president, and set his compensation at $1,000 a week plus two percent of sales orders, not to exceed $80,000 a year without prior approval of Timberline's board of directors. Goss testified the purpose of Timberline was to capture the manufacturing profits that suppliers Deltec and Kingsberry had previously realized from Eagle's Nest homes.

In September 1986, Timberline Building Systems, Inc. was incorporated by Straight, Gandolfi, Goss, and Pam, with these four likewise listed as the initial directors. However, shortly after incorporation, Straight, Gandolfi, Goss, and Pam each owned twenty-three percent of the company, with the president of Eagle's Nest, John Chester, owning the remaining eight percent, and Goss and Chester became the directors of Timberline's board. Thereafter, Straight and Gandolfi fired Chester from Eagle's Nest, resulting in Chester's dismissal as a director of Timberline in 1991, and Pam's replacement of him on the board.²

Timberline manufactured the panelized homes, and Eagle's Nest sold them. As part of its production of the homes, Timberline would fabricate them, provide drawings, codes, and packing lists needed to build the homes, load them, and contact the trucking company for delivery to the job site. At some point, Timberline also manufactured some homes for American Accent Homes, Inc. (American Accent), a company started by Straight and Gandolfi in 1986, which was the only other Timberline customer of any significance.³ For a period of about four to six years, Timberline provided between eight to twelve houses a year for American Accent. During this time, in March 1990, Straight bought Gandolfi's interest in Eagle's Nest. Straight wanted to shut down American Accent, but Gandolfi instead talked Straight into selling his interest in American Accent to another man, Mr. Helms. While Straight sold his shares in American Accent, Gandolfi retained his shares. A conflict eventually developed between Straight and Gandolfi regarding American Accent. As a result, Straight requested Timberline initiate a lawsuit against American Accent.⁴ Timberline subsequently incurred over $184,000 in legal fees related to the action against American Accent.

Allied Products and Services, LLC was a separate company set up by Goss and Pam. From 1993 through 1998, Timberline transferred funds to Allied totaling $341,772. According to Goss, the company was set up based on a model of one of Straight's companies, and with the advice of both an accountant and an attorney, for the purpose of distributing equal profits to the Gosses as were distributed to Straight. Allied did not manufacture any products, but did provide some payroll services to Timberline in the early years of the company.

While Timberline initially leased premises for the manufacture of the panelized homes, the leased premises incurred two separate fires over the years and were acquired by a new landlord, who wanted to take over the building occupied by Timberline. Thereafter, Goss and Pam found and purchased at an auction for themselves property (the Wickes property) that met Timberline's needs in August 1997, and in early 1998, Timberline moved to this new facility. Rent was charged to Timberline based on the recommendation of an economic development director as to what constituted competitive rent for that space. The Wickes property was subsequently transferred to Commerce Properties in December 1999.

In June 1998, Pam purchased truss manufacturing machinery and started a company called Custom Built Trusses (CBT). In July 1998, CBT began building trusses in one of the buildings located on the Wickes property. In October 1998, CBT's articles of incorporation were filed listing Pam as the registered agent for and incorporator of the business. CBT supplied the trusses Timberline needed for the manufacture of panelized houses, with cost based on the price charged by Timberline's previous supplier before that company's latest price increase.

Over time, Timberline experienced serious financial difficulties as sales declined substantially. It delivered its last home for Eagle's Nest in March 2000. Goss began closing Timberline down at that time and continued that process until around June of that year. CBT ceased operating on December 31, 2000. In January 2001, Goss and Pam began operating Structural Component Systems, Inc., a company that is the successor of CBT. In April 2001, Straight filed this action. Thereafter, in June 2005, Timberline filed for bankruptcy and this matter was automatically stayed. Straight moved the bankruptcy court to lift the stay and, as a result of negotiations between Straight and the bankruptcy trustee, the bankruptcy court modified the stay to allow the action to move forward, provided all proceeds recovered in the action be transmitted to the trustee and be property of the bankruptcy estate.

This matter was heard by a special referee by order of reference dated September 29, 2005. The referee noted Straight had abandoned his individual claims and chose to continue on the derivative claims alone, asserting the following four causes of action in his derivative suit: (1) negligent mismanagement; (2) conversion, (3) breach of fiduciary duty, and (4) civil conspiracy. The referee found the specific claims by Straight included the payment of excess wages to the Gosses, the use of Timberline employees and material for CBT, the purchase of the Wickes property and development of the truss business, and the transfer of funds to Allied from Timberline. The referee further noted the Gosses had brought a counterclaim against Straight and a third party claim against Eagle's Nest for money owed Timberline and for minority shareholder oppression.

After considering the evidence, the referee determined (1) no excess salary had been received by the Gosses, (2) the funds initially provided by Timberline for the payment of CBT employees were offset by the trusses delivered to Timberline but not paid to CBT, (3) Timberline did not have the ability to acquire the Wickes property and no funds of Timberline were improperly used to improve the Wickes property for the benefit of Commerce, (4) Timberline did not have the capital and resources necessary for the creation of a truss business and the truss business therefore was not a business opportunity for Timberline, and Timberline was treated fairly in all respects by CBT, and (5) the transfer of funds to Allied, along with certain payments of attorney's fees and special commissions, were essentially distributions of profits to the shareholders,...