Title: BIRL LYNCH AND R.C. LYNCH, EUNICE LYNCH, LYNCH CONSULTANTS, INC., A Wyoming Corporation, AND LYNCH MANAGEMENT SERVICES v. PAT PATTERSON, in his individual capacity as Stockholder of LYNCH CONSULTING, INC., A Wyoming Corporation; PAT PATTERSON, in his individual capacity as Stockholder of LYNCH CONSULTING, INC., A Wyoming Corporation v. EUNICE LYNCH, BIRL LYNCH, R.C. LYNCH, LYNCH CONSULTANTS, INC., A Wyoming Corporation, and LYNCH MANAGEMENT SERVICES

State: wyoming

Issuer: Wyoming Supreme Court

Document:

BIRL LYNCH AND R.C. LYNCH, EUNICE LYNCH, LYNCH CONSULTANTS, INC., A Wyoming Corporation, AND LYNCH MANAGEMENT SERVICES  v. PAT PATTERSON, in his individual capacity as Stockholder of LYNCH CONSULTING, INC., A Wyoming Corporation; PAT PATTERSON, in his individual capacity as Stockholder of LYNCH CONSULTING, INC., A Wyoming Corporation v. EUNICE LYNCH, BIRL LYNCH, R.C. LYNCH, LYNCH CONSULTANTS, INC., A Wyoming Corporation, and LYNCH MANAGEMENT SERVICES1985 WY 73701 P.2d 1126Case Number: 84-185, 84-186Decided: 06/14/1985Supreme Court of Wyoming
BIRL LYNCH AND R.C. 
LYNCH, APPELLANTS (DEFENDANTS), EUNICE LYNCH, LYNCH CONSULTANTS, INC., A WYOMING 
CORPORATION, AND LYNCH MANAGEMENT SERVICES (DEFENDANTS), 

v. 

PAT PATTERSON, IN HIS 
INDIVIDUAL CAPACITY AS STOCKHOLDER OF LYNCH CONSULTING, INC., A WYOMING 
CORPORATION, APPELLEE (PLAINTIFF). 

PAT PATTERSON, IN HIS 
INDIVIDUAL CAPACITY AS STOCKHOLDER OF LYNCH CONSULTING, INC., A WYOMING 
CORPORATION, APPELLANT (PLAINTIFF), 

v. 

EUNICE LYNCH, APPELLEE 
(DEFENDANT), BIRL LYNCH, R.C. LYNCH, LYNCH CONSULTANTS, INC., A WYOMING 
CORPORATION, AND LYNCH MANAGEMENT SERVICES (DEFENDANTS).

 
 
Appeal from the District 
Court, NatronaCounty, R.M. Forrister, 
J.

 
 
James R. 
McCarty, Casper, 
for Birl Lynch, R.C. Lynch and Eunice Lynch.

Harry E. 
Leimback, Casper, for Pat 
Patterson.

Before THOMAS,* C.J., and ROSE, ROONEY,** BROWN and CARDINE, JJ.

* Became Chief Justice 
January 1, 1985.

** Chief Justice at time of 
oral argument.

PART 
I

ROSE, 
Justice.

[¶1.]     These appeals stem from 
a stockholders' derivative action brought by Pat Patterson, a minority 
stockholder of Lynch Consulting Services, Inc., to recover damages allegedly 
resulting from actions taken by the three corporate directors in violation of 
their fiduciary duties to the corporation. The defendant directors and 
corporation counterclaimed against Patterson, alleging that he breached his 
fiduciary duties as a former director by entering into competition with Lynch 
Consulting Services, Inc. Following trial, the district court ruled that 
directors Birl Lynch and R.C. Lynch had engaged in certain instances of 
self-dealing that were unfair to the corporation, and awarded Patterson $79,800 
in damages. The court dismissed Patterson's claims against director Eunice Lynch 
and Lynch Management Services, a partnership made up of defendants Birl Lynch 
and R.C. Lynch. The court also dismissed the counterclaim against Patterson. We 
will direct correction of computation errors and affirm the judgment in all 
respects.

FACTS

[¶2.]     In October, 1979, Pat 
Patterson purchased a 30 percent interest in an oil-field consulting business 
operated by Birl Lynch and his son, R.C. Lynch. The three individuals conducted 
business as a partnership until April, 1980, when they incorporated under the 
name of Lynch Consulting Services, Inc. (LCS). Thirty percent of the corporate 
voting stock was issued to Patterson and 35 percent each to Birl Lynch and R.C. 
Lynch. The three shareholders served as the directors and officers of the 
corporation.

[¶3.]     In February, 1981, 
Patterson informed the other directors of his desire to either buy their shares 
or sell his own. No agreement was reached concerning this proposal, and on 
February 28, 1981, Patterson resigned from his positions as vice president and 
director of the corporation. During the following month, Patterson formed his 
own consulting company and subsequently worked for Sunmark Exploration on a job 
which he had generated while serving as a director and officer of LCS. 
Eventually, Patterson acquired the business of several former LCS 
clients.

[¶4.]     At a special meeting of 
the LCS board of directors on February 28, 1981, Birl Lynch and R.C. Lynch 
accepted Patterson's resignation and appointed R.C. Lynch vice president of the 
corporation. Eunice Lynch, the wife of Birl Lynch, was elected secretary of the 
board.1 According to the minutes of that 
meeting, the directors, in recognition of the increased responsibilities to Birl 
Lynch and R.C. Lynch, doubled the compensation of Birl Lynch and R.C. Lynch for 
a total monthly income to each of $8,000.

[¶5.]     From March 1, 1981, 
through December, 1981, Birl Lynch and R.C. Lynch received the salaries approved 
by the board at the February 28th meeting and, in addition, drew $7,416.58 each 
in bonuses. At a special meeting held January 1, 1982, the directors voted 
unanimously to discontinue payment of these salaries and to hire Lynch 
Management Services (LMS), a newly formed partnership composed of Birl Lynch and 
R.C. Lynch, to manage the corporation. The directors further agreed, by 
unanimous vote, to convene regularly and to pay Birl Lynch and R.C. Lynch 
monthly directors' fees of $1,300 each.

[¶6.]     Pursuant to the 
agreement between the two companies, LCS, in January, 1982, began paying LMS 
$17,000 per month in management fees. LMS disbursed $16,000 of this money in 
monthly salaries to Birl Lynch and R.C. Lynch and retained $1,000 for expenses. 
While receiving these fees, LMS sought business as an oil-field consultant in 
its own right and was continuing to do so at the date of trial. The corporate 
shareholders received no benefit from the business acquired for the management 
company.

[¶7.]     During the first 
complete fiscal year under the management of LMS (May 1, 1982, through April 30, 
1983), the corporation operated at a net loss of $302,744, compared to $91,928 
in net earnings from operations during the previous fiscal year. On April 30, 
1983, the corporation's liabilities exceeded its assets by $105,494. One year 
earlier the corporation's net assets had amounted to 
$362,274.

[¶8.]     Lynch Management 
Services, on the other hand, posted net earnings of $154,950 during its first 
year of existence (January 1, 1982, through December 31, 1982). Its net assets 
increased from the partners' original contribution of $969 to $11,572. 
Furthermore, in the year prior to trial, LMS acquired three consulting jobs for 
itself, but none for LCS.

[¶9.]     At the February and 
March, 1982, board meetings, the directors of LCS agreed to purchase two city 
lots for the construction of an office building. The corporation paid $85,000 
for the property and sold it four months later, by unanimous vote of the 
directors, to Birl Lynch and R.C. Lynch for $75,000.

[¶10.]  Based on these facts adduced at trial, 
the district judge concluded that Birl Lynch and R.C. Lynch, as directors of 
LCS, were fiduciaries to Patterson, a minority shareholder. The court ruled that 
Birl Lynch and R.C. Lynch had engaged in self-serving transactions with the 
corporation and had failed to establish the fairness of their dealings. The 
court found the following corporate expenditures to be 
improper:

Directors' Fees                                                         
$  
26,000

Increased officers' 
salaries of $4,000 

per month for each of two 
defendants 

from March 1, 1981, 
through 

December 31, 1981                                                 
$  
80,000

Management fees actually 
paid to 

LMS, less proper 
expenditures for 

administration and 
salaries of $9,000 

per month for 16 months 
                             
$150,000

Benefit to Birl Lynch and 
R.C. Lynch 

from sale of real 
property                             
$  10,000 

TOTAL                                                            
$266,000

[¶11.]  The trial judge ruled that Birl Lynch and 
R.C. Lynch were directly liable to Patterson for his pro-rata share of these 
losses sustained by the corporation. Accordingly, the court entered judgment 
against Birl Lynch and R.C. Lynch for $79,800, the amount due to Patterson as a 
result of his 30 percent interest in the corporation. Patterson's claim against 
Eunice Lynch and the defendants' counterclaim were 
dismissed.

ISSUES

[¶12.]  Birl Lynch and R.C. Lynch present the 
following questions for our consideration:

"A. Whether the court 
erred in awarding judgment in favor of Pat Patterson as an individual rather 
than to the corporation.

"B. Whether the court 
erred in awarding recovery of directors fees paid during the months of January 
through October, 1982.

"C. Whether the court 
erred in awarding judgment for an increase in salaries of four thousand dollars 
($4,000.00) per month to each of Birl and Bob Lynch for the period from March 1, 
1982 [sic], until January 1, 1982.

"D. Whether the court 
erred in awarding damages to Patterson for management fees paid by the 
corporation to Lynch Management Services.

"E. Whether the court 
erred in awarding damages to Patterson for earnest money paid by the corporation 
for the purchase of real property.

"F. Whether the court 
erred in dismissing the counterclaim against Pat 
Patterson."

Patterson raises 
a single issue:

"Whether the District 
Court erred in releasing the Defendant Eunice Lynch from responsibility under 
the judgment awarded to Pat Patterson, Plaintiff."

DIRECT RECOVERY BY 
SHAREHOLDER

[¶13.]  The parties as well as the trial court 
treated this litigation as a stockholders' derivative suit brought on behalf of 
the corporation. As a general rule, recovery in such actions inures to the 
corporation rather than to the stockholders as individuals. Note, Shareholders' Right to Direct Recovery in 
Derivative Suits, 17 Wyo.L.J. (1963). We referred to this principle in Centrella v. Morris, Wyo., 597 P.2d 958, 
962 (1979), quoting from Smith v. 
Stone, 21 Wyo. 62, 95, 128 P. 612, 621 (1912):

"`* * * The stockholder, 
either individually or as the representative of the class, may commence the 
[derivative] suit, and may prosecute it to judgment; but in every other respect 
the action is the ordinary one brought by the corporation, it is maintained 
directly for the benefit of the corporation, and the final relief, when 
obtained, belongs to the corporation, and not to the stockholder-plaintiff.'" 
Quoting from the early work of Pomeroy's Equity Jurisprudence (3d Ed.), § 
1095.

[¶14.]  Nevertheless, courts sometimes permit 
pro-rata recovery by individual shareholders to prevent an award from reverting 
to the wrongdoers who remain in control of the corporation. Backus v. Finkelstein, 23 F.2d 357 
(D.Minn. 1927); Dill v. Johnston, 72 Okla. 149, 179 P. 608 (1919); Crichton v. Webb 
Press Co., Ltd., 113 La. 167, 36 So. 926 (1904); Eaton v. Robinson, 19 R.I. 146, 31 A. 1058 (1895). See also Perlman v. 
Feldman, 219 F.2d 173 (2nd Cir. 1955). The federal district court in Backus v. Finkelstein reasoned that 
individual recovery was necessary to avoid further 
litigation:

"* * * For obvious 
reasons, it may be highly improper to direct that the moneys here recovered on 
behalf of the corporation shall be paid into the treasury thereof. That might be 
paying the moneys back into the custody and control of those from whom the 
recovery is had. It might defeat effectually the purpose of the suit and be the 
beginning of another prolonged cycle of litigation. Unless conditions shall 
ensue which will materially change the situation, the distribution, so far as 
possible, should be directly to the individuals who will ultimately be entitled 
thereto." 23 F.2d  at 366.

We find the 
reasoning in this opinion sound and applicable to the case at bar. Corporate 
recovery would simply return the funds to the control of the wrongdoers. The 
three defendant directors in the case at bar constitute the policy-making body 
of the corporation. Smith v. Stone, 
supra. They manage the business and affairs of the corporation under statutory 
authority.2 Furthermore, two of the directors 
hold 70 percent of the voting stock in the corporation. Given the family 
orientation and small number of shareholders of LCS, any change in control of 
the corporation is unlikely.

[¶15.]  Direct recovery assures that Patterson 
will reap some benefit from his lawsuit. We refuse to order payment into the 
corporate treasury in this case and risk necessitating a subsequent suit by 
Patterson to compel the directors to declare a dividend or apply the funds to 
legitimate corporate purposes.

DUTY OF LOYALTY TO THE 
CORPORATION

[¶16.]  The trial court found that Birl Lynch and 
R.C. Lynch breached their fiduciary duties to LCS and its shareholders, in that 
they profited from a series of transactions to the detriment of the corporation. 
On appeal, the Lynches contend that their actions were permissible under the 
Wyoming Business Corporation Act, §§ 17-1-101 through 17-1-1011, W.S. 1977, 1984 
Cum.Supp. They urge this court to hold that a complaining stockholder must 
establish fraud or unreasonableness in order to recover damages from a director 
who enters into contracts with the corporation or approves his own compensation. 
Our prior cases, however, as well as those from other jurisdictions, require a 
challenged, interested director to prove that he acted in good faith and that 
the contested transactions were fair to the corporation. The Wyoming Business 
Corporation Act does not dictate a contrary result.

Contracts with Interested 
Directors

[¶17.]  In Nicholson v. Kingery, 37 Wyo. 299, 261 P. 122 
(1927), we reviewed a transaction in which a corporation sold its controlling 
interest in a bank to an individual who served as director of both institutions. 
The corporation took back notes from the transferred bank in consideration. We 
held that the interested director bore the burden of showing by clear and 
convincing evidence that the transaction was open, fair and 
honest:

"* * * [I]f upon a 
careful scrutiny of the record it appears to a court of equity that the director 
has been open, fair and honest in his dealings with the corporation, and has 
secured no advantage by his contract to the detriment of the corporation it will 
be upheld. * * *

"Since in this case the 
defendant directors offered no testimony to overcome the presumption of fraud 
imposed upon them by law from the fact that they were acting both for themselves 
and the [corporation], we need go no farther than to hold that when it is shown 
by competent evidence that a director of a corporation acted both for himself 
and for the corporation in purchasing the property of a corporation, that the 
burden of proof is cast upon him to show by clear, convincing evidence that the 
transaction was open, fair and honestly made and that he did not profit by such 
sale to the disadvantage of the corporation." 261 P.  at 
124.

We reaffirmed 
this rule of law in Voss Oil Company v. 
Voss, Wyo., 367 P.2d 977, 979 (1962), where we held that interlocking 
directors who profited from a transaction to the disadvantage of the corporation 
were liable to the corporation in damages. The Supreme Court of the United 
States described this fiduciary obligation of corporate directors and majority 
stockholders in Pepper v. Litton, 308 U.S. 295, 306-307, 60 S. Ct. 238, 245, 84 L. Ed. 281 (1939):

"* * * Their dealings 
with the corporation are subjected to rigorous scrutiny and where any of their 
contracts or engagements with the corporation is challenged the burden is on the 
director or stockholder not only to prove the good faith of the transaction but 
also to show its inherent fairness from the viewpoint of the corporation and 
those interested therein. Geddes v. 
Anaconda Copper Mining Company, 254 U.S. 590, 599, 41 S. Ct. 209, 212, 65 L. Ed. 425. The essence of the test is whether or not under all the circumstances 
the transaction carries the earmarks of an arm's length bargain. If it does not, 
equity will set it aside."

[¶18.]  We do not believe that the legislature in 
enacting § 17-1-136.1(a), W.S. 1977, 1984 Cum.Supp., intended to relieve the 
defendant of the burden of proving fairness in cases such as the one before us. 
That section provides: 

"(a) No contract 
or other transaction between a corporation and one (1) or more of its directors 
or any other corporation, firm, association or entity in which one (1) or more 
of its directors are directors or officers or are financially interested, shall 
be either void or voidable because of the relationship or interest or because 
the director or directors are present at the meeting of the board of directors 
or a committee thereof which authorizes, approves or ratifies the contract or 
transaction or because his or their votes are counted for the purpose, 
if:

"(i) The fact of the 
relationship or interest is disclosed or known to the board of directors or 
committee which authorizes, approves or ratifies the contract or transaction by 
a vote or consent sufficient for the purpose without counting the votes or 
consents of the interested directors; or

"(ii) The fact of the 
relationship or interest is disclosed or known to the shareholders entitled to 
vote and they authorize, approve or ratify the contract or transaction by vote 
or written consent; or

"(iii) The contract or 
transaction is fair and reasonable to the corporation."

The defendant 
directors do not argue that the transactions at issue here are protected by § 
17-1-136.1(a)(i) or (ii). Rather, their position seems to be that a showing of 
the defendant's interest in a corporate contract is insufficient to invalidate 
it and, therefore, the plaintiff must at least establish the unreasonableness of 
a challenged transaction.

[¶19.]  We decline to read § 17-1-136.1(a)(iii) 
as broadly as the defendants urge. The fiduciary obligation of a director is a 
fundamental component of the corporate structure. It is embodied in § 
17-1-133(b), W.S. 1977, 1984 Cum.Supp., which imposes upon directors the 
affirmative duties of good faith, loyalty and care:

"(b) A director shall 
perform his duties as a director including his duties as a member of any 
committee of the board upon which he may serve, in good faith, in a manner he 
reasonably believes to be in the best interests of the corporation, and with 
such care as an ordinarily prudent person in a like position would use under 
similar circumstances. * * *"

The very nature 
of these fiduciary standards of conduct demands that a challenged director bear 
the burden of establishing that a contract under which he benefits also serves 
the best interests of the corporation. Pepper v. Litton, supra; Nicholson v. Kingery, supra. See also Fliegler v. Lawrence, Del., 361 A.2d 218 (1976). We hold, therefore, that under 
§ 17-1-136.1(a)(iii) an interested director, unable to rely on subparts (i) or 
(ii), bears the burden of proving by clear and convincing evidence that a 
challenged transaction was fair and reasonable to the 
corporation.

[¶20.]  In Thomasi v. Koch, Wyo., 
660 P.2d 806, 811 (1983), we reviewed our appellate duties when considering 
factual matters determined by the district court under the clear-and-convincing 
standard. We said:

"* * * [I]t is the 
district court, not this court, which must be satisfied that there was clear and 
convincing evidence sufficient to establish a [disputed fact]. Ward v. Waterman, 85 Cal. 488, 24 P. 930 
(1890). * * * This court previously has adopted language to this 
effect:

"`* * * When the evidence 
is such that the mind readily reaches a satisfactory conclusion as to the 
existence or nonexistence of a fact in dispute, then the evidence is, of 
necessity, clear and satisfactory.' Continental Sheep Co. v. Woodhouse, 71 
Wyo. 194, 202, 256 P.2d 97 (1953), quoting language found in Good Milking Mach. Co. v. Galloway, 168 
Iowa 550, 150 N.W. 710, 712 (1915).

"We further had said that 
clear and convincing evidence is `that kind of proof which would persuade a 
trier of fact that the truth of the contention is highly probable.' MacGuire v. Harriscope Broadcasting Co., 
Wyo., 612 P.2d 830, 839 (1980)." 660 P.2d  at 811-812.

[¶21.]  The uncontradicted evidence at trial 
established that Birl Lynch and R.C. Lynch stood on both sides of the agreement 
to hire LMS to manage the corporation. While drawing $17,000 per month in 
management fees, LMS took for itself consulting jobs which otherwise would have 
gone to the corporation. LCS operated at a loss under this arrangement while the 
management company showed a profit. The only justification presented at trial 
for this agreement was that it provided advantages for cash flow and tax 
planning. The trial judge concluded that Birl Lynch and R.C. Lynch had failed to 
establish the fairness to the corporation of those management fees in excess of 
$9,000 per month. The evidence supports this factual finding of the trial court 
and we will not disturb it on appeal. Thomasi v. Koch, 
supra.

[¶22.]  The trial court also found that Birl 
Lynch and R.C. Lynch had not carried their burden of proof with respect to the 
conveyance of two city lots to themselves at a loss to the corporation of 
$10,000. The trial court was not required to accept the defendants' explanation 
that Patterson's refusal to guarantee a property-improvement loan necessitated 
the distress sale. We will sustain the trial court's conclusion, supported by 
the evidence, that the Lynches failed to prove the fairness of the conveyance by 
clear and convincing evidence. Thomasi v. 
Koch, supra.

Executive Compensation 
and Directors' Fees

[¶23.]  The Wyoming Business Corporation Act 
permits the board of directors to set directors' fees3 and to elect or appoint officers to 
manage the corporate business.4 Although courts hesitate to inquire 
into the reasonableness of executive compensation fixed by a disinterested 
board, a stricter standard prevails when the recipient has set his own 
compensation. Wilderman v. Wilderman, Del. Ch., 315 A.2d 610, 615 (1974). In such cases, the burden 
falls on the director to prove the reasonableness of the challenged 
compensation. Wilderman v. Wilderman, supra; Goldman v. Jameson, 290 Ala. 160, 275 So. 2d 108, 114 (1973); Fendelman v. Fenco Handbag Manufacturing 
Co., Mo., 
482 S.W.2d 461, 463, 53 A.L.R.3d 347 (1972). This requirement, as in the 
previously discussed cases involving contracts with interested directors, stems 
from the fiduciary position which directors hold towards their corporation and 
its stockholders. Wilderman v. Wilderman, 
supra.

[¶24.]  Courts have established factors to 
consider in determining whether a defendant has met his burden with respect to 
the reasonableness of his fee or salary. These criteria include the recipient's 
ability, services and time devoted to the company, the size and complexities of 
the business, success achieved, corporate earnings and profits, increase in 
volume or quality of business, the prevailing general economic conditions, a 
comparison of salaries with distributions to stockholders, compensation for 
comparable positions in comparable concerns, and the amount previously received 
as a salary. Wilderman v. Wilderman, 
supra; Goldman v. Jameson, supra; Fendelman v. Fenco Handbag Manufacturing 
Co., supra.

[¶25.]  In the instant case, the minutes of the 
board meeting held February 28, 1981, and testimony presented at trial establish 
that the directors believed that Birl Lynch and R.C. Lynch were entitled to 
double their salaries as a result of increased responsibilities due to 
Patterson's resignation. The defendants did not specify what these additional 
responsibilities entailed; they presented no evidence of increased earnings 
which justified the extra compensation; neither did they attempt to establish 
how their salaries compared with those of executives in similar businesses. They 
offered no explanation for increasing the salaries of two officers, while 
refusing to declare a dividend so that nonexecutive stockholders could share in 
the company profits. The evidence supports the trial court's conclusion that the 
defendants failed to establish the reasonableness of executive salaries in 
excess of $4,000 per month each. We will not disturb on appeal this factual 
finding supported by the evidence. Pine 
Creek Canal No. 1 v. Stadler, Wyo., 
685 P.2d 13, 19 (1984).

[¶26.]  The Lynches contend that Patterson should 
not be allowed to recover for excessive executive salaries because he did not 
claim for such damages in his complaint. However, Paragraph 5 of the complaint 
alleges that the defendants had conspired to divert assets from the 
corporation:

"5. Each of the 
above-named defendants became members and agents of an illegal and fraudulent 
conspiracy, the purpose of which was to divert to themselves or to persons with 
whom they were or are associated, the assets of Lynch Consultants, Inc., and 
wrongfully, legally and fraudulently to the use of the assets of Lynch 
Consultants, Inc. for their own selfish personal interest, advantage and profit, 
and for the personal interest, advantage and profit of persons and associates 
with whom they were or are interested to the financial loss and contrary to the 
interest of the plaintiff as a stockholder of said corporation. In furtherance 
of this conspiracy and to serve their own wrongful purposes, Defendants took 
certain steps as alleged herein and pursuant of the 
conspiracy."

Although the 
complaint does not specify excessive salaries, the allegations in Paragraph 5 
were sufficient to give notice to the defendants that the plaintiff contested 
the removal of assets from the corporation, whether in the form of salary 
increases or otherwise.

[¶27.]  A complaint which gives fair notice to 
the opposing party of the claims against him satisfies the specificity standard 
of notice pleading under our rules of civil procedure.5 Guggenmos v. Tom Searl-Frank McCue, 
Inc., Wyo., 481 P.2d 48, 51-52 (1971). Allegations 
of particular acts or omissions of the defendant are unnecessary where the duty 
owed by the defendants appears to exist and to have been breached. Harris v. Grizzle, Wyo., 599 P.2d 580, 583 
(1979). This rule holds especially where the facts lie more properly in the 
knowledge of the adverse party and details of the breach are available through 
discovery. Harris v. Grizzle, 
supra.

[¶28.]  In the instant case, the fact that the 
defendants had voted themselves salary increases as well as the reasonableness 
of such compensation lay more properly within the knowledge of the directors of 
LCS. Patterson complained that the directors had breached their fiduciary 
obligations by diverting funds from the corporation to its detriment. This 
allegation sufficed to inform the defendants that an issue existed as to the 
reasonableness of the executive salaries and we will not overturn the award for 
excessive compensation on the ground of a defective 
complaint.

[¶29.]  With respect to the reasonableness of the 
directors' fees paid to Birl Lynch and R.C. Lynch beginning in January, 1982, 
the minutes of the board meeting reflect that the fees were intended to 
compensate the Lynches for holding monthly meetings. The defendants offered no 
explanation as to why such fees were reasonable in the face of a depressed 
economy and rapidly declining revenues, or why Eunice Lynch, the third director, 
received no fees for attending directors' meetings. The evidence supports the 
trial court's conclusion that the defendants failed to establish the 
reasonableness of paying Birl Lynch and R.C. Lynch $1,300 per month each in 
directors' fees. We will, therefore, sustain the court's finding on appeal. Pine Creek Canal No. 1 v. Stadler, 
supra.

COMPETITION WITH 
CORPORATION BY FORMER DIRECTOR

[¶30.]  Birl Lynch and R.C. Lynch contend that 
Patterson, by forming an oil-field consulting business in competition with LCS, 
breached his fiduciary duties as a former director of the corporation. Absent an 
agreement to the contrary, however, a director or officer who terminates his 
position with the corporation has a right to open his own business and to 
compete for former clients. Master 
Records, Inc. v. Backman, 133 Ariz. 494, 
652 P.2d 1017 (1982); Parsons Mobile 
Products, Inc. v. Remmert, 216 Kan. 256, 531 P.2d 428 (1975). The Supreme 
Court of Arkansas, in Raines v. 
Toney, 228 Ark. 1170, 313 S.W.2d 802, 809 (1958), 
considered the business activities available to a former director and 
officer:

"* * * It is, however, a 
common occurrence for corporate fiduciaries to resign and form a competing 
enterprise. Unless restricted by contract, this may be done with complete 
immunity because freedom of employment and encouragement of competition 
generally dictate that such persons can leave their corporation at any time and 
go into a competing business. They cannot while still corporate fiduciaries set 
up a competitive enterprise. Witmer v. 
Arkansas Dailies, Inc., 202 Ark. 470, 151 S.W.2d 971, 
or resign and take with them the key personnel of their corporations for the 
purposes of operating their own competitive enterprise. Duane Jones Company, Inc. v. Burke, 306 N.Y. 172, 117 N.E.2d 237. But they can, while still employed, notify their 
corporation's customers of their intention to resign and subsequently go into 
business for themselves, and accept business from them when offered to them. Aetna Building Maintenance Co. v. West, 
39 Cal. 2d 198, 246 P.2d 11. But they can use in their own enterprise the 
experience and knowledge they gained while working for their corporation. Witmer v. Arkansas Dailies, Inc., supra. 
They can solicit the customers of their former corporation for business unless 
the customer list is itself confidential. Continental Car-Na-Var Corporation v. 
Moseley, 24 Cal. 2d 104, 148 P.2d 9."

Clearly, 
Patterson breached no duty to LCS shareholders by accepting consulting jobs 
offered by the corporation's clients after he had established his business. Birl 
Lynch and R.C. Lynch contend, however, that Patterson took for his own benefit 
the Sunmark Exploration job which had been generated for LCS with corporate 
funds while Patterson served as a director and officer of the 
corporation.

[¶31.]  The trial court made no express findings 
of fact in dismissing this counterclaim against Patterson. However, we have said 
in the past that a general finding and judgment for the successful party carries 
with it every finding of fact which can reasonably and fairly be drawn from the 
evidence. Burk v. Burzynski, Wyo., 672 P.2d 419, 425 (1983). Since the evidence is in 
conflict on this point, we will abide by our appellate duty to accept the 
evidence of the successful party as true and to leave out of consideration 
entirely the conflicting evidence of the unsuccessful party. Martin v. 
Wing, Wyo., 667 P.2d 1159, 1163 (1983). We will 
sustain the findings of the trial court unless they are clearly erroneous or 
contrary to the great weight of the evidence. Salt River Enterprises, Inc. v. Heiner, Wyo., 663 P.2d 518, 522 
(1983).

[¶32.]  Patterson testified that Sunmark 
Exploration had a special job in the coastal forest which called for his 
expertise. He said that Sunmark Exploration officials knew him, knew his work, 
and wanted him on the job particularly. He further testified that without him 
the corporation would not have received this work. Patterson breached no duty of 
loyalty by resigning from LCS and subsequently performing this work directed to 
him personally rather than to the corporation. Raines v. Toney, supra. The trial 
court's dismissal of the claim against Patterson finds support in the law and 
the facts, and we will not overturn it on appeal. Burk v. Burzynski, 
supra.

1 The minutes do not 
reflect that Eunice Lynch was ever elected a director, but the pleadings reflect 
the acceptance of Eunice Lynch's status as a director, and Birl Lynch testified 
that she had been "named * * * as one of the directors."

2 Section 17-1-133, W.S. 
1977, 1984 Cum.Supp., provides in part:

"The business and affairs 
of a corporation shall be managed under the direction of a board of 
directors."

Section 
17-1-139, W.S. 1977, 1984 Cum.Supp., specifically authorizes the directors to 
declare dividends:

"(a) The board of 
directors of a corporation may, from time to time, declare and the corporation 
may pay dividends on its outstanding shares in cash, property, or its own 
shares, except [under specified conditions] * * *."

3 Section 17-1-133(a), 
W.S. 1977, 1984 Cum. Supp.

4 Section 17-1-142, W.S. 
1977.

5 Rule 8, W.R.C.P., 
provides in part:

"(a) Claims for relief. - A pleading which 
sets forth a claim for relief, whether an original claim, counterclaim, 
cross-claim, or third-party claim, shall contain (1) a short and plain statement 
of the claim showing that the pleader is entitled to relief, (2) a demand for 
judgment for the relief to which he deems himself entitled. * * 
*

* * * * * 
*

"(e) Pleading to be concise and direct * * 
*.

"(1) Each averment of a 
pleading shall be simple, concise, and direct. No technical forms of pleading or 
motions are required.

* * * * * 
*

"(f) Construction of pleadings. - All 
pleadings shall be so construed as to do substantial 
justice."

PART 
II

ROONEY, 
Justice.

[¶33.]  Patterson appeals from that portion of 
the judgment which dismisses his action against Eunice 
Lynch.

[¶34.]  As previously noted, this action is a 
stockholder's derivative action and such is normally brought on behalf of the 
corporation, with resulting damages being paid to the corporation. The duty of 
the directors, the violation of which forms the ground for the action, is a duty 
to the corporation and not a duty to the stockholder instituting the 
action.

"The business and affairs 
of a corporation shall be managed under the direction of a board of directors. * 
* *" Section 17-1-133(a), W.S. 1977, Cum.Supp. 1984.

Section 
17-1-141(a)(i), W.S. 1977, sets forth the liability of the directors to be 
"jointly and severally * * * to the 
corporation" (emphasis added) in the designated cases.

[¶35.]  After recognizing such to be the general 
rule, we applied an exception thereto in the section hereof captioned "DIRECT 
RECOVERY BY SHAREHOLDER." We there said:

"Nevertheless, courts 
sometimes permit pro-rata recovery by individual shareholders to prevent an 
award from reverting to the wrongdoers who remain in control of the corporation. 
* * *"

We 
concluded:

"* * * We refuse to order 
payment into the corporate treasury in this case and risk necessitating a 
subsequent suit by Patterson to compel the directors to declare a dividend or 
apply the funds to legitimate corporate purposes."

[¶36.]  If equity allows direct payment to 
Patterson so as to prevent the award "from reverting to the wrongdoers" (emphasis added) and 
to avoid the "risk [of] necessitating a subsequent suit * * * to compel the 
directors to declare a dividend or apply the funds to legitimate corporate 
purposes" (emphasis added), then equity should cause the funds to be repaid by 
those who received them.

[¶37.]  The judgment was computed by allowing 
$80,000 for increased officers' salaries for each of two defendants (not that of 
Eunice Lynch), allowing $150,000 management fees paid to LMS - in which Eunice 
Lynch had no interest, allowing $10,000 benefit to Birl Lynch and R.C. Lynch 
(not to Eunice Lynch) for sale of real property, and allowing $26,000 for 
directors' fees paid to Birl Lynch and R.C. Lynch (not to Eunice 
Lynch).

[¶38.]  The funds in question, normally to be 
returned to the corporation, were properly returnable by Birl Lynch and R.C. 
Lynch. Once returned, they would not inure to the benefit of Eunice Lynch as a 
stockholder. If used for "a dividend" or to increase corporate assets, Eunice 
Lynch would receive no benefit. She is not a stockholder. If she were to repay 
part of these funds, they would inure to the benefit of Birl Lynch and R.C. 
Lynch as well as to Patterson. They are the three stockholders. Birl Lynch and 
R.C. Lynch are the wrongdoers to whom part of the benefit would inure from 
Eunice Lynch's contribution.

[¶39.]  This is not a case where the improper 
decision of the board of directors resulted in a loss to the corporation without 
such loss going to the directors. The failure by the directors to use the care 
which an ordinary prudent person in a like position would use under similar 
circumstances often causes a loss to the corporation without personal gain to 
the directors. They then should have to repay the loss to the corporation, 
jointly and severally. When the loss results in a gain to one or more, but not 
all, of the directors, those receiving the gain should ultimately bear the 
responsibility of repaying the corporate loss. More than one law suit may be 
necessary to accomplish this goal. 

[¶40.]  In this case, if that received by Birl 
Lynch and R.C. Lynch were specific personal or real property to be returned to 
the corporation, such return would be accomplished without involving Eunice 
Lynch.

[¶41.]  The court properly allocated the 
responsibility for payment of the amount due Patterson resulting from improper 
fiduciary activities on the part of the directors of the corporation; 
Patterson's action against Eunice Lynch was properly 
dismissed.

[¶42.]  The case is remanded for the purpose of 
amending, by interlineation or otherwise, the following improper calculations in 
the Judgment and Decree:

1. , subparagraph c, "One 
hundred fifty-eight thousand dollars ($158,000.00)" should be "one hundred fifty 
thousand dollars ($150,000.00)."

2. , last line, "Two 
hundred twenty-six thousand dollars ($226,000.00)" should be "two hundred 
sixty-six thousand dollars ($266,000.00)."

[¶43.]  The judgment is affirmed in all other 
respects.

ROSE, Justice, dissenting, 
with whom THOMAS, Chief Justice, 
joins.

[¶44.]  I cannot join in Part II of the majority 
opinion which excuses Eunice Lynch from liability in this case. As a voting 
member of the board of directors, she approved a series of transactions which 
destroyed the corporation while enhancing the value of a competing partnership 
composed of her husband and son. Conduct this egregious violates the duty of 
care imposed upon all directors by the Wyoming Business Corporation Act (§§ 
17-1-101 through 17-1-1011, W.S. 1977), regardless of whether she personally 
benefited from her actions. The fact that she voted to funnel corporate funds to 
directors other than herself cannot, as the majority hold, release her from 
liability where the duty and breach are clearly 
established.

DUTY OF 
CARE

[¶45.]  Section 17-1-133(b), W.S. 1977, 1984 Cum. 
Supp., requires that a director of a corporation perform his or her 
duties:

"* * * with such care as an ordinarily prudent 
person in a like position would use under similar circumstances. In 
performing his duties, a director may rely on information, opinions, reports or 
statements, including financial statements and other financial data, in each 
case prepared or presented by:

"(i) One (1) or more 
officers or employees of the corporation whom the director reasonably believes 
to be reliable and competent in the matters presented;

"(ii) Counsel, public 
accountants or other persons as to matters which the director reasonably 
believes to be within the person's professional or expert competence; 
or

"(iii) A committee of the 
board upon which he does not serve, duly designated in accordance with a 
provision of the articles of incorporation or the by-laws, as to matters within 
its designated authority, which committee the director reasonably believes to 
merit confidence, but he shall not be considered to be acting in good faith if 
he has knowledge concerning the matter in question that would cause such 
reliance to be unwarranted. A person who so performs his duties has no liability 
by reason of being or having been a director of the corporation." (Emphasis 
added.)

We held 
directors to this same standard of care prior to the adoption of the Wyoming 
Business Corporation Act, Smith v. 
Stone, 21 Wyo. 62, 128 P. 612 (1912), and it represents the majority 
position. Briggs v. Spaulding, 141 U.S. 132, 11 S. Ct. 924, 35 L. Ed. 662 
(1891); Selheimer v. Manganese 
Corporation of America, 
423 Pa. 
563, 224 A.2d 634 (1966). See The American Law Institute, Principles of 
Corporate Governance: Analysis and Recommendations, Tentative Draft No. 4 (April 
12, 1985), § 4.01. Under this standard, courts will not interfere in questions 
of corporate management or policy, unless the complainant establishes fraud or 
its equivalent. Smith v. Stone, 128 P.  at 619-620. In other words, directors are personally responsible to 
stockholders for losses resulting from fraud, illegality or unfair self-dealing, 
but they will not be held liable for honest mistakes of judgment which are 
fairly related to some rational business purpose. Selheimer v. Manganese Corporation of 
America, supra, 224 A.2d  at 641, citing Spering's Appeal, 71 Pa. 11, 10 Am. Rep. 684 
(1872).

[¶46.]  Courts will step in, however, where the 
directors have wasted the corporate assets and no rational business purpose 
justifies such conduct. New York Credit Men's Adjustment Bureau, Inc. v. 
Weiss, 305 N.Y. 1, 110 N.E.2d 397 (1953). In Selheimer v. Manganese Corporation of 
America, supra, the directors of Manganese poured corporate funds into a 
plant known to be unsuitable for production and failed to use an available plant 
where profitable production was possible. The actions of the directors led to 
the corporation's insolvency, and the Pennsylvania Supreme Court held them 
personally liable in a stockholders' derivative action:

"Defendants' actions in 
respect to the Colwyn plant were not the result of errors in judgment or a 
calculated business risk nor can such actions be classified as mere negligence. 
With the knowledge which defendants had of the unsuitability of the Paterson plant for 
profitable production, the pouring of Manganese's funds into this plant defies 
explanation; in fact, the defendants have failed to give any satisfactory 
explanation or advance any justification for such 
expenditures.

* * * * * 
*

"This record indicates 
clearly that these defendants, as the controlling directors and officers, wasted 
and dissipated Manganese's assets. Their actions constituted negligence such as 
was inimical to the corporation and the other stockholders of this corporation. 
Whether their conduct as directors and officers be measured by the yardstick 
provided in Section 408 of the Business Corporation Law * * *, or by common 
law,[1] their conduct offended their 
fiduciary relationship to this corporation in such manner as to justify the 
imposition upon them of personal liability for such conduct." 224 A.2d  at 
646.

[¶47.]  In the instant case, Eunice Lynch, as one 
of the three directors of LCS, approved the payment of management fees to a 
competing partnership composed of her husband and son. The board of directors 
continued payment of these fees on a monthly basis while the partnership 
performed consulting jobs and the income of the corporation declined. The 
directors voted unanimously to deplete the corporate assets through officers' 
salaries, directors' fees, and the sale of corporate property at a loss. While 
any one of these last actions might not be sufficient to hold a director liable, 
the complete pattern of conduct evidences a program of corporate destruction and 
violates the duty of care imposed on corporate directors by § 17-1-133(b). Such 
behavior cannot be attributed to errors in judgment or calculated business 
risks.

[¶48.]  The Superior Court of New Jersey faced a 
similar situation in Francis v. United 
Jersey Bank, 162 N.J. Super. 355, 392 A.2d 1233 (1978), affirmed 171 N.J. 
Super. 34, 407 A.2d 1253 (1979), cert. granted 82 N.J. 285, 412 A.2d 791 (1980), 
affirmed 87 N.J. 15, 432 A.2d 814 (1981). There, the wife of the principal 
stockholder and leader of Pritchard & Baird sat as a director of that 
corporation while it unlawfully paid substantial sums of money to members of her 
family. The court held Mrs. Pritchard liable for the negligent performance of 
her duties as a director of the corporation:

"It has been urged in 
this case that Mrs. Pritchard should not be held responsible for what happened 
while she was a director of Pritchard & Baird because she was a simple 
housewife who served as a director as an accommodation to her husband and sons. 
Let me start by saying that I reject the sexism which is unintended but which is 
implicit in such an argument. There is no reason why the average housewife could 
not adequately discharge the functions of a director of a corporation such as 
Pritchard & Baird, despite a lack of business career experience, if she gave 
some reasonable attention to what she was supposed to be doing. The problem is 
not that Mrs. Pritchard was a simple housewife. The problem is that she was a 
person who took a job which necessarily entailed certain responsibilities and 
she then failed to make any effort whatever to discharge those responsibilities. 
The ultimate insult to the fundamental dignity and equality of women would be to 
treat a grown woman as though she were a child not responsible for her acts and 
omissions." 392 A.2d  at 1241.

[¶49.]  A recent decision by the Supreme Court of 
Delaware also bears on our deliberations here. In Smith v. Van Gorkom, Del., 488 A.2d 858 
(1985), the Delaware court held that corporate directors had breached their 
fiduciary duty of care by failing to inform themselves of reasonably available 
and relevant data prior to entering into a merger agreement. The directors, in 
agreeing to accept a premium of $17 per share over the market price, had lacked 
valuation information, had failed to obtain details of the transaction from its 
proponent, and had reached their decision after only two hours' deliberation. 
488 A.2d  at 874. Nothing in the record indicated that the directors had 
benefited personally from their conduct. In assessing liability, the court ruled 
that directors who attempt to exercise their business judgment without obtaining 
adequate information violate their duty of care to the 
corporation.

[¶50.]  Section 17-1-133(b)(i), permits a 
director to rely on information supplied by other officers or employees of the 
corporation. Eunice Lynch offered no evidence that she voted as she did in 
reliance on this type of information. In any event, I doubt that such reliance 
would have been reasonable under the facts of this case. To afford protection to 
a director, reports by corporate officials must "be entitled to good faith, not 
blind, reliance." Smith v. Van 
Gorkom, 488 A.2d  at 875.

[¶51.]  I would have held that Eunice Lynch, as a 
voting member of the board of directors, breached the duty of care owed to the 
corporation and is, therefore, jointly and severally liable with the other 
directors for damages proved at trial. Direct recovery by Patterson is 
consistent with a finding of liability on the part of Eunice Lynch, since she 
participated as a director in the dissipation of his 30 percent share in the 
corporation. Pro-rata recovery simply prevents the complaining stockholder's 
award from reverting to the control of the three directors who misused the 
corporate funds in the first place.

1 Section 17-1-133(b) of 
the Wyoming Business Corporation Act reflects the common-law duty of care 
imposed upon corporate directors.