Taylor v. Aia Servs. Corp.

• Decision Date: 07 September 2011
• Docket Number: No. 36916.,36916.
• Court: Idaho Supreme Court
• Parties: Reed J. TAYLOR, a single person, Plaintiff/Counterdefendant/Appellant/Cross–Respondent, v. AIA SERVICES CORPORATION, an Idaho corporation; AIA Insurance, Inc., an Idaho corporation; R. John Taylor and Connie Taylor, individually, and the community property comprised thereof; Bryan Freeman, a single person; JoLee Duclos, a single person; and James Beck and Corrine Beck, Defendants/Counterclaimants/Respondents/Cross-Appellants, and Crop USA Insurance Agency, Inc., an Idaho corporation, Defendant–Respondent, and 401(k) Profit Sharing Plan for the AIA Services Corporation, Intervenor/Cross–Appellant.

151 Idaho 552

261 P.3d 829

Reed J. TAYLOR, a single person, Plaintiff/Counterdefendant/Appellant/Cross–Respondent,

v. AIA SERVICES CORPORATION, an Idaho corporation; AIA Insurance, Inc., an Idaho corporation; R. John Taylor and Connie Taylor, individually, and the community property comprised thereof; Bryan Freeman, a single person; JoLee Duclos, a single person; and James Beck and Corrine Beck, Defendants/Counterclaimants/Respondents/Cross-Appellants,andCrop USA Insurance Agency, Inc., an Idaho corporation, Defendant–Respondent,and401(k) Profit Sharing Plan for the AIA Services Corporation, Intervenor/Cross–Appellant.

No. 36916.

Supreme Court of Idaho, Lewiston, May 2011 Term.

Sept. 7, 2011.

Campbell, Bissell & Kirby, PLLC, Spokane, for appellant Reed J. Taylor. Roderick C. Bond argued.

Hawley, Troxell, Ennis & Hawley, Boise, for respondents AIA Services Corporation, AIA Insurance, Inc., and CropUSA Insurance Agency, Inc. D. John Ashby argued.

Quarles & Brady, LLP, Chicago, for respondent CropUSA Insurance Agency, Inc.

Risley Law office, PLLC, Lewiston, for respondents Connie Taylor, James Beck and Corrine Beck. David R. Risley argued.

Gittins Law Offices, Clarkston, for respondents JoLee Duclos and Bryan Freeman. David A. Gittins appeared.

Charles A. Brown, Lewiston, appeared for respondent 401(k) Profit Sharing Plan for the AIA Service Corporation.

R. John Taylor, Lewiston, pro se respondent.

BURDICK, Chief Justice.

On July 12, 1995, AIA Services Corporation (AIA Services) entered into a Stock Redemption Agreement with Appellant Reed Taylor to purchase all of his shares (613,494 shares) in AIA Services for a $1.5 million down payment promissory note, a $6 million promissory note and other consideration. Reed Taylor is the founder of AIA Insurance, Inc. (AIA Insurance), which is a wholly-owned subsidiary of AIA Services, and at the time he negotiated the Stock Redemption Agreement, Reed Taylor was the majority shareholder of AIA Services. AIA Services failed to pay a $1.5 million note issued to Reed Taylor under the Stock Redemption Agreement when it became due on October 20, 1995. Reed Taylor and AIA Services agreed to modify the Stock Redemption Agreement and entered into the Stock Redemption Restructure Agreement, but thereafter, AIA Services failed to make certain payments that had become due under the new terms. On January 29, 2007, Reed Taylor filed suit against AIA Services, AIA Insurance and John Taylor, seeking to recover the amounts owed on the two promissory notes.

On June 17, 2009, the district court granted partial summary judgment in favor of Respondents and dismissed six of Reed Taylor's causes of action upon finding the Stock Redemption Agreement to be illegal and unenforceable under the 1995 version of I.C. § 30–1–6, which restricts a corporation to use only earned surplus and, under certain circumstances, capital surplus when redeeming its shares. Reed Taylor appeals, arguing that the Stock Redemption Agreement complies with I.C. § 30–1–6 and that even if the Stock Redemption Agreement fails to comply with I.C. § 30–1–6, it is still enforceable under numerous theories. Reed Taylor also argues that the district court committed multiple errors in its proceedings. Respondents cross appeal, arguing that all causes of action in Reed Taylor's Complaint should be dismissed. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Reed Taylor is the founder of AIA Insurance, an insurance agency based in Lewiston, Idaho, which sells insurance products to farmers and members of various agricultural growers associations. Reed Taylor was the majority shareholder of AIA Services, a holding company which has wholly-owned AIA Insurance at all times relevant to this lawsuit. In 1995, he held 63 percent of approximately 973,000 outstanding shares of AIA Services common stock and served as the Chairman of the Board of Directors and the Chief Executive Officer of AIA Services.

AIA Services noticed a meeting of shareholders to be held on March 7, 1995, to consider various transactions, including exercising an option to purchase 500,000 of Reed Taylor's 613,494 shares of AIA Services common stock for $7.5 million. At the March 7, 1995 special meeting of shareholders, AIA Services shareholders approved the purchase of Reed Taylor's shares as well as other transactions. The shareholders were not provided information as to the source of funds from which Reed Taylor's shares would be purchased. The plan to redeem Reed Taylor's shares was not consummated because AIA Services failed to raise the necessary funds through the private placement of Series B Preferred Stock and Series C Preferred Stock and Warrants, which the board approved by resolution on January 12, 1995.

AIA Services sent a letter to its shareholders announcing that it could not proceed with the previously approved plan and announced a new plan for reorganization, which included redeeming all of Reed Taylor's AIA Services common stock for $7.5 million and other consideration, including airplanes and debt forgiveness. The letter sought shareholder approval to cancel the previously authorized Series B Preferred Stock and to amend the Articles of Incorporation to increase the number of authorized shares of Series C Preferred Stock from 150,000 to 500,000 shares. The letter informed the shareholders that the sale of the additional Series C Preferred Stock would be used to retire certain Series A Preferred Stock, to retire bank debt and/or to fund the balance of the redemption price due to Reed Taylor. The letter was accompanied by a Confidential Private Placement Memorandum, dated June 1, 1995 ("PPM"), offering up to 500,000 shares of Series C Preferred Stock for $10 per share. The PPM explained: "Assuming the Company sells the maximum number of Shares offered hereby, the net proceeds from this private placement are expected to be sufficient.... If the Company sells only the minimum number of shares, additional financing will be required to complete the proposed reorganization."

On July 12, 1995, AIA Services issued an Amended Notice of Special Meeting of AIA Services Shareholders to occur on July 18, 1995, accompanied by a Disclosure Statement. The notice states that certain transactions contemplated as part of the new reorganization plan require shareholder approval. Neither the notice nor the accompanying disclosure mentions the redemption of Reed Taylor's common stock. At the July 18 meeting, the shareholders were not asked to approve, and did not approve, the redemption of Reed Taylor's common stock. However, on that day, AIA Services' Board of Directors authorized the redemption of Reed Taylor's common stock for $7.5 million and other consideration. The resolution provides that "the amount of the down payment for Mr. Taylor's Common Stock which [AIA Services] may be able to afford will depend on the amount of proceeds from commercial loans and from the sale of additional Series C Preferred Stock and attendant warrants."

AIA Services and Reed Taylor entered into a Stock Redemption Agreement effective July 22, 1995, to redeem all of Reed Taylor's common stock for $7.5 million and other consideration. AIA Services originally agreed to pay $1.5 million at the closing of the Stock Redemption Agreement; however, the parties entered into an Addendum whereby AIA Services would issue a $1.5 million down payment note payable 90 days after closing (the "$1.5M Note"). Pursuant to the Stock Redemption Agreement, Reed Taylor was given debt forgiveness, transfer of title to airplanes and other payments aggregating over $2 million. The balance of the $7.5 million redemption price was to be paid pursuant to a promissory note dated August 1, 1995, in the principal amount of $6 million (the "$6M Note"). The $6M Note provided for monthly interest payments and for all principal and accrued interest to be paid on August 1, 2005. As collateral for the Stock Redemption Agreement, the parties entered into a security agreement that granted Reed Taylor a secured interest in most of AIA Services' assets.

AIA Services was not able to pay the $1.5M Note when it became due on October 20, 1995, and Reed Taylor notified AIA Services that it was in default by three letters from April through June, 1996. On July 1, 1996, Reed Taylor and AIA Services executed the Stock Redemption Restructure Agreement, which called for the $1.5M Note to be paid on October 31, 1996, and the $6M Note to be paid in full on July 1, 2005, with interest payments for ten years. AIA Services again failed to pay the $1.5M Note when it became due, and AIA Services fell behind in making interest payments on the $6M Note.

On January 29, 2007, Reed Taylor filed the Complaint in this lawsuit seeking to obtain the money owed under the Stock Redemption Agreement and the Stock Redemption Restructure Agreement (collectively hereinafter the "Stock Redemption Agreement"). The defendants (hereinafter "Respondents") include AIA Services, AIA Insurance and John Taylor (Reed Taylor's brother and business partner), who were named in the original complaint, as well as other managers and directors of AIA Services, who were added in later amended complaints. The 401(k) Profit Sharing Plan for AIA Services Corporation (the Plan) intervened to assert the illegality of the Stock Redemption Agreement.

In April, 2008, Respondents filed a motion for partial summary judgment concerning the legality of the Stock Redemption Agreement, arguing that when the agreement was entered into, it violated the then-existing I.C. § 30–1–6, which authorizes corporations to redeem their shares but places restrictions on the source of funds used to redeem shares. The district court granted partial summary judgment in favor of Respondents in its Opinion and Order dated June 17, 2009. The district court found that the Stock Redemption Agreement violated I.C. § 30–1–6 because AIA Services did not have any earned surplus when it entered into the agreement and was not authorized...