Case Title: DISCTRONICS LTD v. Disc Mfg., Inc.(Three Cases)

Citation: 686 So. 2d 1154

Docket Number: 1941401, 1941451, 1941559, 1941623

State: alabama

Court: Alabama Supreme Court

Date: 1996-09-13T00:00:00Z

Document:
686 So. 2d 1154 (1996)
DISCTRONICS LIMITED, et al.
v.
DISC MANUFACTURING, INC., and Quixote Corporation.
DISCTRONICS LIMITED, an Australian Corporation, et al.
v.
DISC MANUFACTURING, INC., and Quixote Corporation.
DISC MANUFACTURING, INC., and Quixote Corporation.
v.
DISCTRONICS LIMITED, et al.
DISCTRONICS LIMITED, et al.
v.
DISC MANUFACTURING, INC., and Quixote Corporation.
1941401, 1941451, 1941559 and 1941623.

Supreme Court of Alabama.
September 13, 1996.
Rehearing Denied November 22, 1996.
*1156 Gary C. Huckaby, G. Rick Hall and Carolyn Reed Douglas of Bradley, Arant, Rose & White, Huntsville, for Appellants/Cross Appellees Disctronics Limited.
Roderic G. Steakley, Charles R. Driggars and Melissa W. Larsen of Sirote & Permutt, P.C., Huntsville, for Appellees/Cross Appellants Disc Manufacturing, Inc. and Quixote Corporation.
HOUSTON, Justice.
This is the second time this controversy has come before this Court. The parties have not changed since the resolution of the first appeal. The appellants and cross-appellees are the defendants in the underlying action:
Massey v. Disc Mfg., Inc., 601 So. 2d 449, 450 (Ala.1992). The appellants, except for MTI, will be referred to collectively as the "Disctronics Group" in this opinion, just as they were in our first opinion. The appellees/cross-appellants, the plaintiffs below, are Quixote Corporation and Disc Manufacturing, Inc. (a wholly owned subsidiary of Quixote Corporation). The appellees will be hereinafter referred to collectively as "the plaintiffs."
*1157 The first appeal in this matter, Massey, 601 So. 2d 449, concerned a single issue, whether the trial court had erred in entering a preliminary injunction against the Disctronics Group based upon a theory of usurpation of corporate opportunity. In that opinion, this Court set out the facts underlying the present dispute:
Massey, 601 So. 2d  at 450-53.
This Court set aside the preliminary injunction, holding it improper because:
Massey, 601 So. 2d  at 459. The reason this Court held that a cause of action for usurpation of a corporate opportunity could not be maintained in this case, as a matter of law, was that the undisputed facts showed that the opportunity to purchase MTI was not a corporate opportunity of DMI. "The opportunity presented by MTI was created by the Disctronics Group's relationship with Mitsubishi that had been established long before the Disctronics Group even began negotiations to buy [LaserVideo]." Id. at 457-58. Therefore, this Court found that "[t]he opportunity allegedly usurped from DMI was never DMI's opportunity and could not be so characterized." Id. at 459.
After the case was remanded, the trial judge eventually entered a summary judgment for the Disctronics Group as to a number, but not all, of the plaintiffs' claims. The trial judge, also, dismissed 7 of the Disctronics Group's 12 counts stated in the counterclaim, without specifying the grounds for the dismissal. The summary judgment was made final pursuant to Rule 54(b), Ala. R.Civ.P. Later, the Disctronics Group moved, pursuant to Rule 5, Ala.R.App.P., to allow an immediate appeal of any interlocutory portions of the trial judge's dismissal order. The trial judge granted the Rule 5 motion, and this Court agreed to hear the interlocutory-appeal portions of the Disctronics Group's appeal.
The plaintiffs, Quixote Corporation and Disc Manufacturing, Inc., now appeal from the trial judge's order dismissing Counts I, II, and IV of their first amended complaint. Count I alleged that defendants "Disctronics Limited, Disctronics Australia Limited, Donovan, Massey, Mackie and Adams breached their fiduciary duties to [Disctronics Manufacturing, Inc.], committed corporate waste, and misappropriated [Disc Manufacturing, Inc.'s] corporate opportunities." In Count II, the plaintiffs alleged that defendants "Disctronics Limited, Disctronics Australia Limited, Massey, Mackie, Donovan and Adams breached their fiduciary duties to Quixote[, a minority shareholder in DMI], committed corporate waste, and misappropriated DMI's corporate opportunities." Count IV alleged that the various defendants conspired to tortiously interfere with DMI's contractual and business relations and also conspired "to cause and aid [Disctronics Limited, Disctronics Australia Limited, Massey, Mackie, Donovan, and Adams] in the breach of their fiduciary duties to DMI."
The trial judge did not state his reasoning in the original order dismissing Counts I, II, and IV of the plaintiffs' first amended complaint, but in a later order denying the plaintiffs' "motion for reconsideration" the trial judge stated the basis for the summary judgment:
If the plaintiffs' claims contained in Counts I, II, and IV of the first amended complaint were based solely upon allegations of usurpation of corporate opportunity as regards the opportunity presented by MTI, the trial judge's reasoning would be totally correct. Our decision in the first appeal clearly disposed of any and all of the plaintiffs' claims that are premised upon the theory that the defendants are liable for usurpation of corporate opportunity regarding the Disctronics Group's purchase of MTI. However, Counts I, II, and IV also seek relief based upon alleged wrongful conduct said to have occurred after the Disctronics Group purchased *1160 MTI. The issue whether the post-MTI-purchase conduct of the Disctronics Group defendants breached any fiduciary duty legitimately owed to the plaintiffs' corporations was not before this Court on the first appeal, and, therefore, was not decided. See Cooper v. Bailey, 288 Ala. 84, 86, 257 So. 2d 332, 333 (1972) ("This court does not decide questions which are unnecessary to the disposition of a case on appeal.").
If our first opinion is not read in the context of the single issue presented to this Court in the first appeal, then the language in it would seem to be very broad. However, because the undisputed facts showed that the MTI opportunity clearly arose before the time of the 1989 Work-Out Agreement, it was not necessary for this Court to fully consider the nature of the post-Work-Out Agreement relationship of the parties to this action.[1] Our opinion did not hold that dominant majority shareholders, who are not sole shareholders, do not, under Delaware law, the law applicable to the plaintiffs' breach of fiduciary duty claims, owe fiduciary duties to the corporations that they control.[2] Delaware law clearly establishes that such shareholders do owe certain fiduciary duties by virtue of their status as dominant shareholders and the consequent potential for abuse. See, e.g., Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del.1971). Not only is it clearly established under Delaware law that "[a] shareholder that owns a majority interest in a corporation, or exercises actual control over its business affairs, occupies the status of a fiduciary to the corporation," but it is also clearly established that such a shareholder also "occupies the status of a fiduciary to ... [the corporation's] minority shareholders." In re MAXXAM, Inc., 659 A.2d 760, 771 (Del.Ch.1995) (citing Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110, 1113 (Del.1994)). Furthermore, no citation to authority is even necessary to support the proposition that a corporation's officers and board of directors owe certain fiduciary duties to the corporation, under any state's corporation law.
The claims contained in Counts I, II, and IV of the plaintiffs' complaint were not preempted by this Court's decision in Massey v. Disc Mfg., Inc., 601 So. 2d 449 (Ala. 1992), to the extent that those claims seek redress for alleged post-MTI-purchase breaches of fiduciary duty by DMI directors and corporate officers and to the extent that those claims seek redress on behalf of DMI and Quixote for alleged post-MTI-purchase breaches of fiduciary duty by DMI's majority shareholder. Therefore, the summary judgment is reversed as to the claims contained in Counts I, II, and IV.
The Disctronics Group appeals from the dismissal of 7 of their 12 counterclaim counts. The counts dismissed were: (1) Count I, which sought relief based upon a breach of an implied covenant of good faith and fair dealing; (2) Count II, which sought relief based upon an economic duress theory; (3) Count IV, which sought relief based upon a theory of unjust enrichment; (4) Count VII, which sought relief based upon an account and account stated theory; (5) Count VIII, which sought relief based upon a theory of money had and received; (6) Count IX, which sought relief under an unfair competition theory; and (7) Count XI, which sought relief for an alleged breach of fiduciary duty by a director of DMI who was associated with Quixote and an alleged seizure of corporate opportunity by Quixote.
*1161 The trial court failed to state the reasoning supporting, or even the grounds for, its dismissal of these counterclaim counts. After the Disctronics Group filed its counterclaim, the plaintiffs initially argued that the defendants had failed to state a valid claim as to any of the claims dismissed, relying on Rule 12(b)(6), Ala.R.Civ.P. Subsequently, the plaintiffs filed a summary judgment motion, arguing, first, that Alabama courts lack the subject matter jurisdiction to decide Counts I, II, IV, and VIII of the counterclaim, and, second, that the claims contained in Counts I, II, IV, and XI had been released. Therefore, the question before this Court is whether the trial court's dismissal of each counterclaim count was proper, based on any of the dismissal arguments that the plaintiffs made as to that count.
We will address the plaintiffs' jurisdictional argument first. The plaintiffs argue that exclusive subject matter jurisdiction over disputes arising out of or related to the Work-Out Agreement was vested in Illinois state courts by the Work-Out Agreement itself, or, in the alternative, by the "Agreed Final Order" issued by the Circuit Court of Cook County, Illinois, which set aside the March 21, 1989, settlement agreement and, pursuant to the Work-Out Agreement, dismissed Quixote Corporation's original claims.
We need not determine whether the Work-Out Agreement language the plaintiffs cite can be read to vest in Illinois state courts exclusive jurisdiction to deal with disputes arising under the Work-Out Agreement, because contractual forum selection clauses are not enforceable in Alabama's courts. In Redwing Carriers, Inc. v. Foster, 382 So. 2d 554, 556 (Ala.1980), this Court held:
The question whether the Agreed Final Order of the Cook County Circuit Court prevented the trial court from validly taking jurisdiction and deciding the defendants' counterclaims raises a much more difficult question, though, because of the interplay of the Full Faith and Credit Clause of the United States Constitution, Article IV, § 1.
The Full Faith and Credit Clause is basically a constitutional rule of res judicata. It requires that a state court respect the final judgments issued by the courts of other states. In other words, "[t]he general rule is that this command requires the judgment of a sister State to be given full, not partial, credit in the State of the forum." New York v. Halvey, 330 U.S. 610, 614, 67 S. Ct. 903, 906, 91 L. Ed. 1133 (1947). But "[f]or a judgment to be absolutely entitled to extrastate recognition under the full faith and credit clause, it must be final, in the sense that it is not subject to being reopened and modified." Robert A. Leflar et al., American Conflicts Law, § 83, p. 247 (4th ed. 1986). Whether a judgment is final and therefore entitled to res judicata treatment under the Full Faith and Credit Clause is determined according to "the local law of the state of rendition." Restatement (Second) of Conflict of Laws, § 107 (1971).
The Agreed Final Order entered by the Cook County, Illinois, Circuit Court states:
Because the Agreed Final Order was entered by an Illinois court, we must look to Illinois law to determine if it is final for purposes of the Full Faith and Credit Clause. The Illinois Appellate Court stated in Kandalepas v. Economou, 269 Ill.App.3d 245, 252, 206 Ill. Dec. 538, 543, 645 N.E.2d 543, 548 (1994):
(Citations omitted.) See also People v. Joliet Trust & Savings Bank, 315 Ill.App. 11, 42 N.E.2d 90 (1942). Therefore, according to Illinois law, the Agreed Final Order is not a final judgment entitled to res judicata effect, but is, instead, a contract between the settling litigants; therefore, the Full Faith and Credit clause does not require that the Agreed Final Order be enforced to any greater extent than it would be if it were simply a contract.[3] As already stated, Alabama courts do not enforce contractual forum selection clauses. See, e.g., Redwing Carriers, Inc. v. Foster, supra.
Before considering whether any of the Disctronics Group's counterclaims were released, we consider whether those claims were due to be dismissed under Rule 12(b)(6), Ala.R.Civ.P., for failure to state a claim. In Rice v. United Ins. Co. of America, 465 So. 2d 1100 (Ala.1984), this Court held:
465 So. 2d  at 1101.
All parties agree that under Alabama's choice of law rules Illinois law is the correct law to be applied to Counts I, II, IV, VII, and VIII of the defendants' counterclaim. Our question then becomes whether any of those counterclaims "sufficiently pleaded facts that if proven would entitle [the defendants] to recover" under a judicially recognized theory of recovery under Illinois law. Anonymous v. Anonymous, 672 So. 2d 787, 790 (Ala.1995).
The Disctronics Group, as counterclaim plaintiff, cited no Illinois authority, outside of the insurance context, demonstrating, under Illinois law, the legitimacy of their claim alleging breach of the covenant of good faith and fair dealing, contained in Count I of their counterclaim. The Disctronics Group argues that this Court should take it upon itself to expand Illinois's tort of bad faith beyond the insurance context into the field of commercial contracts. In Martin v. Federal Life Ins. Co., 109 Ill.App.3d 596, 65 Ill.Dec. 143, 440 N.E.2d 998 (1982), the Illinois Appellate Court rejected a similar argument for the extension of the tort of bad faith into the employment-contract context, holding:
109 Ill.App.3d at 605-07, 65 Ill.Dec. at 150, 440 N.E.2d  at 1005-06. It seems clear that if Illinois courts will not expand the tort of bad faith beyond the insurance context and into the employment contract context then those courts surely would not expand the tort of bad faith into the commercial contract context; therefore, the dismissal of Count I is due to be affirmed.
In Count II, the Disctronics Group sought relief based upon an allegation of economic duress. Because economic duress is an affirmative defense to a breach of contract action, we can only construe this count as seeking rescission of the Work-Out Agreement. In order for a party to obtain relief under Illinois law based upon a theory of economic duress, the party seeking relief must allege, on the part of the other party to the contract in question, a wrongful act that caused the complaining party to enter into an agreement that he would not have assented to otherwise. See Alexander v. Standard Oil Co., 97 Ill.App.3d 809, 53 Ill.Dec. 194, 423 N.E.2d 578 (1981); see also Carlile v. Snap-On Tools, 271 Ill.App.3d 833, 840, 207 Ill.Dec. 861, 866, 648 N.E.2d 317, 322, app. denied, 163 Ill. 2d 550, 212 Ill.Dec. 416, 657 N.E.2d 617 (1995) ("Economic duress is present where one is induced by a wrongful act of another to make a contract under circumstances depriving him of the exercise of free will."). Count II reads as follows:
The Disctronics Group alleged no wrongful act on the part of Quixote to support a finding of economic duress. The fact that Quixote threatened to force LVAC, a defaulting debtor corporation, into bankruptcy does not constitute a wrongful act, because "threatening to do that which one has a legal right to do" is not wrongful under Illinois law. Carlile, 271 Ill.App.3d at 840, 207 Ill. Dec. at 866, 648 N.E.2d  at 322. "Nor does the defense of duress exist where consent to an agreement is secured because of mere hard bargaining or the pressure of financial circumstances." Id. The dismissal of Count II of the counterclaim is, therefore, due to be affirmed.
In Counts IV (unjust enrichment) and VIII (money had and received), the Disctronics Group attempts to obtain equitable relief based upon the Disctronics Group's loss of *1164 ownership of DMI under the terms of the Work-Out Agreement. The case of Barry Mogul and Assocs., Inc. v. Terrestris Dev. Co., 267 Ill.App.3d 742, 750-51, 205 Ill.Dec. 294, 643 N.E.2d 245, 251-52 (1994), app. denied, 159 Ill. 2d 563, 207 Ill.Dec. 513, 647 N.E.2d 1006 (1995), states:
(Emphasis added.) The defendants' equitable counterclaims likewise impermissibly seek to use equitable theories to shift the risk imposed upon them by an express contract (the Work-Out Agreement). The dismissal of Counts IV and VIII of the defendants' counterclaim is, therefore, affirmed, because those counts fail to state a legally cognizable claim under Illinois law.
In Count VII of the counterclaim, the Disctronics Group sought relief based upon an account stated theory. The factual basis of this claim is contained in Count VI ("Breach of Contract for $300,000 Escrow"), which was not dismissed. In Count VI, the defendants alleged:
Under Illinois law, "[a]n account stated [is] defined as an agreement between parties who have had previous transactions that the account representing those transactions is true and that the balance stated is correct, together with a promise, express or implied, for the payment of such balance." W.E. Erickson Constr., Inc. v. Congress-Kenilworth Corp., 132 Ill.App.3d 260, 267, 87 Ill. Dec. 536, 542, 477 N.E.2d 513, 519 (1985), judgment aff'd. and remanded, 115 Ill. 2d 119, 104 Ill.Dec. 676, 503 N.E.2d 233 (1986). Count VII merely states that "[c]ounter-defendants owe to counter-plaintiffs the sum of $300,000 due by open account and account stated." This clearly fails to state a claim for relief under an account-stated theory under Illinois law, for myriad reasons, including the fact that the Disctronics Group did not allege that Quixote had agreed that the amount was due and payable. Count VII is merely a disguised breach of contract claim, which is not needed, because the Disctronics Group can obtain such relief under Count VI of its counterclaim. The dismissal of Count VII of the defendants' counterclaim complaint was, therefore, proper.
*1165 In Count XI, the Disctronics Group sought to join a claim against a former member of the DMI board of directors who was placed on that board by Quixote while Quixote was a minority shareholder in DMI. Count XI alleged:
(Emphasis added.) Count XI was correctly dismissed, because the Disctronics Group, as a former stockholder of DMI, was impermissibly attempting to bring a direct action based upon a wrong allegedly suffered by DMI. Only through a derivative action can a stockholder seek redress for injury to the corporation in which he owns stock; the Disctronics Group did not seek to pursue a derivative action. Count XI, therefore, fails to state a claim upon which relief may be granted.
In Count IX of the counterclaim, the Disctronics Group alleged that the plaintiffs' continued use of certain trademarks and tradenames that had been used by DMI while it was part of the Disctronics Group is wrongful and constitutes "palming off" under Alabama's common law. The parties agree that Alabama law governs this claim, because DMI's principal place of business was in Alabama. There is no question that Alabama law provides a remedy for "palming off."[4] Because Count IX of the Disctronics Group's counterclaim "sufficiently pleaded facts that if proven would entitle [the Disctronics Group] to recover," Anonymous, 672 So. 2d  at 790, under Alabama unfair competition law, the dismissal of this count cannot be justified under Rule 12(b)(6), Ala. R.Civ.; therefore, as to this count the order of dismissal is due to be reversed.
Quixote and Disc Manufacturing, Inc., also argued to the trial court that they were entitled to a summary judgment as to Counts I (breach of the implied covenant of good faith and fair dealing), II (economic duress), IV (unjust enrichment), and XI (breach of fiduciary duty), because, they claimed, those claims were subject to a release. Because we hold that the trial court could have properly based the dismissal of Counts I, II, IV, and XI solely upon Rule 12(b)(6), Ala.R.Civ. P., we need not address whether any of those claims had been contractually released.
We have considered the parties' other allegations of trial court error and conclude that the trial judge did not err in those respects.
1941401 AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.
1941451 AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.
1941559 REVERSED AND REMANDED.
1941623 AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.
HOOPER, C.J., and MADDOX, ALMON, SHORES, KENNEDY, INGRAM, and BUTTS, JJ., concur.
[1]  The 1989 Work-Out Agreement clearly changed the nature of the relationship of the parties to the present dispute. As of the date of the agreement, DMI was no longer the wholly owned subsidiary of the Disctronics Group, because the Work-Out Agreement clearly shifted a 49% interest in the voting stock of DMI to Quixote Corporation, along with 12% of DMI's preferred nonvoting stock, making Quixote Corporation a minority shareholder in DMI. Although the Disctronics Group defendants argue otherwise, that agreement extinguished the prior debtor-creditor relationship, transforming the debt owed to Quixote Corporation into equity in DMI and LVAC.
[2]  Delaware law is the law applicable to the plaintiffs' breach of fiduciary duty claims, because "[t]he established rule of conflicts law is that `the internal corporate relationship is governed by the law of the state of incorporation.'" Massey v. Disc Mfg., Inc., 601 So. 2d 449, 454 (Ala.1992) (quoting P. John Kozyris, Corporate War and Choice of Law, 1985 Duke L.J. 1, 15).
[3]  Even if the Agreed Final Order were considered to be a final judgment under Illinois law, it is highly questionable that the Full Faith and Credit clause would require Alabama courts to decline jurisdiction in this case even given the inclusion of the exclusive jurisdiction provision in question. According to the leading authorities, orders attempting to localize a dispute to one jurisdiction's courts are not always entitled to full faith and credit:

"Sometimes an injunction is granted restraining parties from maintaining a particular action in another state. If the ground on which the injunction is based be fraud in the transaction sued upon, or some other fact going to the existence of the cause of action, it amounts to a decision on the merits and bars a later suit. But if the injunction be granted because of the inconvenience of an action being brought away from the place where the cause of action arose and the parties and witnesses reside, or for similar reasons of the forum non conveniens type, it is not based on the substantive merits of the cause of action, and is no bar to the maintenance of the ... extrastate action, even though the court in which the action is pending may voluntarily respect the order if it wishes to do so. The injunction is directed against parties, not against the second court."
Robert A. Leflar et al., American Conflicts Law, § 83, p. 246 (4th ed. 1986).
Furthermore, "[a] judgment rendered in one State of the United States need not be recognized or enforced in a sister State if such recognition or enforcement is not required by the national policy of full faith and credit because it would involve an improper interference with important interests of the sister State." Restatement (Second) of Conflict of Laws, § 103 (1971).
[4]  See, e.g., Jefferson Home Furniture Co. v. Jefferson Furniture Co., 349 So. 2d 5, 8 (Ala.1977), which states:

"Unfair competition generally consists of `palming off' on customers, who are buying with ordinary care, the goods or business of one person as and for the goods or business of another. Empire Guano Co. v. Jefferson Fertilizer Co., 201 Ala. 277, 78 So. 53 (1917)...."