Walta v. Gallegos Law Firm, PC, 20,913.

• Citation: 131 N.M. 544, 2002 NMCA 15, 40 P.3d 449
• Case Date: December 14, 2001
• Court: Court of Appeals of New Mexico

40 P.3d 449

131 N.M. 544

2002 NMCA 15

Mary E. WALTA, Plaintiff-Counterdefendant-Appellee, v. GALLEGOS LAW FIRM, P.C., a New Mexico professional corporation, and J.E. "Gene" Gallegos, Defendants-Counterclaimants-Appellants.

No. 20,913.

Court of Appeals of New Mexico.

December 14, 2001.

Certiorari Denied January 28, 2002.

K. Stephen Royce, Maureen A. Sanders, Sanders & Westbrook, P.C., Philip B. Davis, Albuquerque, NM, for Appellee.

Sarah Singleton, Montgomery & Andrews, P.A., Steven L. Tucker, Tucker Law Firm, P.C., Santa Fe, NM, for Appellants.

Certiorari Denied, No. 27,281, January 28, 2002.

OPINION

BUSTAMANTE, Judge.

{1} This case involves the contested restructuring of a professional corporation engaged in the practice of law. J.E. "Gene" Gallegos (Gallegos) appeals the jury's award of punitive damages in favor of Mary E. Walta (Walta) for breach of fiduciary duties with respect to the purchase of Walta's stock in the corporation. Gallegos argues that the award of punitive damages cannot be supported for three reasons: (1) he fulfilled his fiduciary duties as a majority stockholder of a close corporation in purchasing the stock of a minority shareholder by disclosing all material information bearing on the value of the stock, (2) the "economic loss rule" bars recovery in tort when damages flow from a breach of contract, and (3) punitive damages cannot be awarded absent proof of a culpable state of mind coexistent with the conduct that constitutes the breach of legal duty. We affirm and address the nature of the fiduciary duties shareholders and directors of close corporations owe to each other.

{2} Our discussion of the scope of fiduciary duty will inform our examination of the standard of conduct necessary to support the award of punitive damages in this context.

{3} We decline to address the economic loss rule argument. This argument was not made in any manner or form to the trial court. Gallegos acknowledges this issue was not preserved below, but urges us to apply a fundamental error analysis to reach the issue. We do not believe the issue is appropriate for application of fundamental error. Gracia v. Bittner, 120 N.M. 191, 196, 900 P.2d 351, 356 (Ct.App.1995). In fact, given our holding in this case, there was likely no error at all.

BACKGROUND

{4} The Gallegos Law Firm, P.C. (GLF), is a New Mexico professional corporation engaged in the practice of law. Gallegos founded GLF in 1987 and has always served as the corporation's president. Walta joined GLF in January 1990. As of November 1994, GLF had five attorney-shareholders: Gallegos, Walta, Michael Condon, David Sandoval, and Glenn Theriot. At that time, Gallegos owned 4,000 shares (50%) of GLF's stock. Walta owned 2,000 shares (25%) of GLF's stock. The balance of the corporation's 8,000 issued and outstanding shares were held by Condon (1,000 shares), Sandoval (900 shares), and Theriot (100 shares).

{5} While GLF enjoyed reasonable financial success, it experienced sporadic financial pressures during 1993 and 1994. This resulted in some dissension among its shareholders. As early as June 1992, Walta had spoken in opposition to GLF's acceptance of certain contingency fee cases. On a number of occasions, Walta told Gallegos that the manner in which GLF accepted contingency fee cases should be reformed. Walta thought GLF was becoming too indebted on its line of credit because of its contingency case load. Gallegos responded with annoyance at Walta's concerns because he believed his experience made him more qualified than Walta to evaluate such cases.

{6} Walta felt Gallegos often singled her out as the source of his irritation. By 1993 GLF had become heavily involved in several contingent fee matters taken on by Gallegos that were taxing GLF's resources. Despite this, Gallegos had GLF spending heavily, including a corporate aircraft with added pilot and hangar expense. Expenses remained high and the bank lines of credit were heavily utilized. During an April 1993 shareholder meeting, Gallegos abruptly cut off Walta's efforts to discuss GLF's finances, saying:

[H]e didn't need [her] to tell him how to do — how to manage a firm. That he had been practicing law for 35 years. He didn't need [her] input. He didn't need [her] to tell him how to take cases.... And then he said to [her] "I am sick and tired of you nagging at me. You remind me of one of my ex-wives, and the same thing is going to happen to you that happened to her if you don't be quiet."

Later in 1993, Gallegos wanted Walta and Condon to sign a personal guarantee for GLF's burgeoning line of credit. When they disagreed with his demand, Gallegos discontinued their stock purchase rights.

{7} In early November 1994, Gallegos invited Walta to lunch. Walta characterized this as an unusual event. He questioned Walta about her future plans, referenced Walta's growing practice, and specifically asked her whether she planned to leave GLF soon. Walta, surprised, said she had no plans to leave. Gallegos then repeated to Walta his "five year plan" to phase out of the practice of law and his desire to implement it. Gallegos indicated to Walta that he did not expect the GLF structure to change as he phased out of active practice.

{8} A few days later on November 27, 1994, Gallegos circulated a memorandum to each of GLF's four other shareholders, including Walta, proposing that GLF purchase their stock, leaving Gallegos the sole shareholder. The memorandum was left on each shareholder's desk on the Sunday evening following Thanksgiving. As an alternative, Gallegos suggested Walta and the other three shareholders could purchase Gallegos' stock with Gallegos departing from the firm if any of the shareholders believed that the proposal was not reasonable and acceptable. The memorandum implied that Gallegos' desire to dissolve GLF was motivated by his wish to devote more time to his family and personal interests, and by a desire to change the manner in which he practiced law.

{9} Walta testified that, immediately upon reading the memorandum, she believed the memorandum "fired" her, that it was directed at getting her out of GLF, and that her departure was a "done deal" over which she had no control. Walta concluded that Gallegos' proposals violated the GLF's by-laws, and she obtained legal advice concerning her rights. Walta kept all this to herself; she did not inform Gallegos that she objected to either proposal set forth in the memorandum until her last day at GLF, four months later on March 31, 1995. Walta testified that she did not talk to Gallegos about the memorandum because of the "angry tone" of the memorandum, and because she feared that Gallegos would retaliate against her for doing so.

{10} The terms of the proposal included that "stock will be surrendered and valued in accordance with the corporate by-laws as of December 31, 1994 and your employment terminated at that time." The firm's by-laws distinguished between "vested" and "non-vested" stock when valuing a departing shareholder's stock surrendered to the corporation. Walta's 2,000 shares of GLF stock included both vested and non-vested stock. For non-vested stock, generally, the shareholder would be paid the equivalent of the purchase price of the stock or no less than "the exact cost of the stock to him or her." Walta and the other shareholders had paid $10 per share. Vested stock was not so easily valued.

{11} Stock became "vested" only if a shareholder had at least three years of employment commencing from "the date that he or she first acquired shares in the corporation." A shareholder surrendering vested stock would receive "present book value ... as of the effective date of termination." The by-laws defined "present book value" as follows:

[T]he calculation of per share value resulting from total[ ]ing the assets of the corporation, subtracting the liabilities of the corporation, and dividing the net sum, if any, by the number of shares issued and outstanding. For this valuation, the corporate assets shall not include unbilled work in progress, but shall include collectible accounts receivable, including those billed for the month in which the shareholder's termination or disqualification is effective. Present book value shall be calculated as of the effective date of the shareholder's termination or disqualification.

If the computation of "present book value" yielded a negative value, or a value of less than $10 per share, the value of the vested stock would nevertheless be deemed to be the shareholder's acquisition price; $10 per share.

{12} GLF's shareholders met on December 15, 1994. All five shareholders, including Walta attended. Gallegos solicited responses to the November 27, 1994, memorandum. Walta commented on several aspects of the proposal, such as the need to extend the transition period, the effect of the proposal on the firm's clients, and the need to have time for the clients to decide whether their matters would stay with GLF or go with departing shareholders. It is uncontradicted that, during this meeting, Walta did not raise any concerns about valuation and buy-out of her stock or about the termination of her employment by the firm. At the conclusion of the meeting, Gallegos stated that he was open to extending the shareholders' transition until March 31, 1995; this was eventually done.

{13} On January 4, 1995, GLF's shareholders sent Gallegos a memorandum authored by Walta raising "[a] number of questions... as to the proposed buy-out," and suggesting a shareholders' meeting to discuss the buy-out. The first of the multiple questions in the memorandum was "[t]iming. Unofficially set for 3/31/95. Is this now a firm date?"

{14} Gallegos responded on January 6, writing "The end of the transition period is firmly March 31, 1995." His memorandum further stated:

The operative date for stock evaluation is December 31, 1994. While the by-laws provide for options to purchase additional shares in

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