Vorachek v. Citizens State Bank of Lankin, 890229

• Decision Date: 02 October 1990
• Docket Number: No. 890229,890229
• Citation: 461 N.W.2d 580
• Parties: Joseph VORACHEK, Georgetta Vorachek, Bernadine Mahon, Lynette O'Linn, State ex rel. Citizens State Bank of Lankin, Plaintiffs and Appellees, v. CITIZENS STATE BANK OF LANKIN, a North Dakota corporation, LaVerne Gaarder, personally and as Personal Representative of M.W. Vorachek Estate, Defendants and Appellants, and Roger Vorachek and W.J. Vorachek, Defendants and Appellees. Civ.
• Court: North Dakota Supreme Court

Page 580

461 N.W.2d 580

Joseph VORACHEK, Georgetta Vorachek, Bernadine Mahon,

Lynette O'Linn, State ex rel. Citizens State Bank

of Lankin, Plaintiffs and Appellees, v. CITIZENS STATE BANK OF LANKIN, a North Dakota corporation, LaVerne Gaarder, personally and as Personal

Representative of M.W. Vorachek Estate,

Defendants and Appellants,

and

Roger Vorachek and W.J. Vorachek, Defendants and Appellees.

Civ. No. 890229.

Supreme Court of North Dakota.

Oct. 2, 1990.

Michael J. Williams (argued), Fargo, for plaintiff and appellee Joseph Vorachek.

Fleming, DuBois & Trenbeath, Cavalier, for plaintiffs and appellees Bernadine Mahon and Lynette O'Linn; argued by Neil W. Fleming.

Stenehjem, Foss & Moore, Bismarck, for defendant and appellant Citizens State Bank of Lankin; argued by Marilyn Foss.

LaVerne Gaarder, Edmore, pro se.

Hamilton, Juntunen & Cilz, Grand Forks, for defendant and appellee W.J. Vorachek; argued by R. Lee Hamilton.

GIERKE, Justice.

The Citizens State Bank of Lankin and LaVerne Gaarder appealed from a district court order granting the plaintiffs' request for an "interim court monitor" to observe and report on the operations of the Bank pending a final determination of the merits of this shareholder derivative action. We treat the appeal as a petition for exercise of our supervisory jurisdiction, and we deny the petition in part and grant the petition in part.

The factual background of this case is stated in Vorachek v. Citizens State Bank of Lankin, 421 N.W.2d 45 (N.D.1988) [Vorachek I ] and will be repeated to the extent necessary to decide the issues raised in this appeal. The Bank is a family-owned banking corporation with its principal place of business in Lankin, North Dakota. The plaintiffs, Joseph Vorachek, Georgetta Vorachek, Bernadine Mahon, and Lynette O'Linn, are minority stockholders in the Bank. Roger Vorachek, W.J. Vorachek, and Gaarder, personally and as Personal Representative of the Estate of M.W. Vorachek, are majority stockholders, officers, directors, and employees of the Bank. The plaintiffs brought this action alleging that the defendants paid themselves excessive salaries, bonuses, loan write-offs, and other job-related benefits and that they wasted and converted Bank assets for their private use. The plaintiffs sought damages, an accounting, a declaration of dividends, removal of directors, punitive damages, receivership, and dissolution of the Bank.

After the defendants repeatedly failed to comply with the plaintiffs' discovery requests, the trial court entered an order striking the defendants' answer, granting a default judgment against them on liability as a sanction for discovery abuse, and appointing Roger Reule as "Court Monitor." The court's order made Reule "Executive Vice President" of the Bank and appointed him to the Board of Directors. Reule was also given authority to hire employees, to make recommendations regarding disposition of Bank assets, to calculate the compensation paid to the defendants, to consult with the Bank regarding significant transactions, and to file a report with the court. The court's order also excluded Roger and W.J. Vorachek, the president and vice-president of the Bank, from the Bank and precluded the Bank from compensating them. LaVerne Gaarder was ordered to continue operating the Bank but her salary was reduced from $120,000 to $30,000 per year.

The default judgment and order appointing Reule as "Court Monitor" constituted the basis for the appeal in Vorachek I. While Vorachek I was pending and after Reule submitted his report to the district court, the court issued another order discharging Reule and appointing an accounting firm as "Court Monitor" with limited functions to observe and report Bank management activity. That order also raised LaVerne Gaarder's salary to $42,000 per year and, subject to certain limitations, returned authority to operate the Bank to its board of directors.

In Vorachek I, we concluded that, under the extremely unusual circumstances of the case involving the defendants' attorney's inherent conflict of interest, the court abused its discretion in entering a default judgment as a sanction for discovery abuse, and we reversed the judgment. In discussing the court's authority to appoint a "Court Monitor" and restrict the defendants' operations of the Bank, we said:

"The extraordinary remedies utilized by the trial court in this case were included in a judgment which entered default on the issue of liability against the defendants. These provisions were apparently intended by the court as interim relief in contemplation of dissolution of the corporation or a forced buy-out of the minority shareholders' interests. The record indicates that this relief was based entirely upon the entry of default on the issue of liability. We have, however, held that imposition of default was in error, and have thereby displaced the foundational basis for those remedies. Therefore, the extraordinary remedies provided in the judgment must also be reversed. ⁵

Because of off-the-record, post-judgment occurrences which precluded a determination of the appropriate relief on appeal, we remanded to the district court for that determination, stating:

"On remand, the trial court will be authorized, if deemed appropriate, to impose lesser sanctions for the discovery abuses which have occurred in this case." Vorachek I, supra, 421 N.W.2d at 54.

On remand the plaintiffs moved for interim relief pending a final determination of the case. Citing Sections 32-10-01, 10-19.1-115, and 10-19.1-116, N.D.C.C., the court noted its statutory authority to appoint a receiver pendente lite to preserve corporate assets but said that "the appointment of a court monitor whose only responsibility is to observe and report the actions of Bank management, plus the imposition of certain limitations on Bank management relating to compensation, constitute a far less extreme measure than the appointment of a receiver, and appear to be well within what the legislature intended [in Section 10-19.1-116(1), N.D.C.C.] when it granted the Court authority to 'take other actions required to preserve the corporate assets.' " The court acknowledged that "the Bank had been reasonably well run by defendant LaVerne Gaarder, but that excessive and inappropriate compensations had been paid," and granted the following interim relief:

"1. An interim court monitor is hereby appointed, effective immediately. (If the previous monitor, the accounting firm of Olafson and Olson, is willing to serve as interim court monitor, that firm is hereby appointed. If not, then plaintiffs' counsel are directed to confer among themselves and with defendants' counsel to recommend to the Court a competent, impartial individual to serve in this capacity.)

"2. The interim court monitor shall obtain from the defendant Bank and its management at least monthly a report of all salaries, bonuses, expenses, expense accounts and allowances, retirement benefits, and any other thing or item of economic value in excess of $10.00 per month, paid to, on behalf of, or in favor of any of the shareholders, officers and directors of the Bank, or any of their family members, as well as all loans written off for any such shareholder, officer, director, or family member thereof.

"3. The interim court monitor shall be given timely notice of every meeting of the Board of Directors, and shall be permitted to attend any and all such meetings. The interim court monitor shall be provided with the copy of the minutes of every meeting of the Board of Directors on the first business day following any such meeting. The interim court monitor shall promptly forward to the Court and all counsel copies of all information obtained from the bank, along with any reports the monitor may deem appropriate. The interim court monitor shall report to the court and counsel any matter of concern regarding the Bank's operation, any instance of a suspected or possible violation of this order, or any instance of failure by any of the Bank's directors, officers or employees to cooperate fully with the monitor. The directors, officers and employees of the Bank are hereby ordered to cooperate fully with the monitor and its agents in every respect. The interim court monitor shall submit a statement to the defendant bank at least monthly for all services rendered pursuant to this order, and the Bank shall promptly pay for all such services.

"4. LaVerne Gaarder shall continue to serve as a chief operating officer of the Bank, and shall receive a total compensation not to exceed $3,500.00 per month, plus actual expenses. Officers, directors and employees of the Bank may be reimbursed only for reasonable expenses actually and necessarily incurred in the course of their employment by the Bank, and only upon written voucher fully itemizing such expenses: automobile expenses, when properly incurred and vouchered, may be reimbursed at a rate not to exceed 25 cents per mile.

"5. All of the directors, officers, shareholders, employees of the defendant bank and their agents are hereby restrained and enjoined from taking any action which might jeopardize or impair the Bank's operations, safety or soundness, or the value of the Bank as a financial institution or as a corporation, or the value of the interest of any shareholder or shareholders of the Bank, pending further order of the court."

Gaarder and the Bank have appealed.

We initially discuss the appealability of the trial court's order. Our framework for analyzing this court's jurisdiction in cases where there is an appeal and there are unadjudicated claims remaining to be resolved by the trial court is now settled. First, the order appealed from must satisfy one of the criteria set forth in Section 28-27-02, N.D.C.C. Jerry Harmon Motors, Inc. v. First National Bank & Trust Co., 436 N.W.2d 240 (N.D.1989). Second, if the order does meet one of the statutory criteria, then Rule 54(b),...