Title: Danuser v. IDA Marketing Corp.

State: north-dakota

Issuer: North Dakota Supreme Court

Document:

IN
THE SUPREME COURT STATE OF NORTH DAKOTA 2013 ND
196Reed H. Danuser, Plaintiff and
Appelleev. IDA Marketing Corporation; IDA of Moorhead
Corporation; James Leach, Steve Leach, David P. Gruenhagen, and Val Tareski, Defendants IDA Marketing Corporation; IDA of Moorhead Corporation; James
Leach, AppellantsNo. 20120443Appeal from the
District Court of Cass County, East Central Judicial
District, the Honorable Wickham Corwin, Judge.AFFIRMED.Opinion of the Court by Maring, Justice.Ronald H. McLean (argued) and Peter W. Zuger (appeared), P.O. Box 6017, Fargo, N.D.
58108-6017, for plaintiff and appellee.Michael D.
McNair, P.O. Box 2189, Fargo, N.D. 58108-2189, for defendant and appellant IDA of
Moorhead Corporation.Robert B. Stock (argued)
and Vanessa L. Anderson (appeared), P.O. Box 1389,
Fargo, N.D. 58107-1389, for defendant and appellant James Leach.Danuser v. IDA MarketingNo. 20120443Maring, Justice.[¶1] James Leach, IDA Marketing Corporation, and IDA of Moorhead
Corporation appeal from a judgment holding them jointly and severally liable to Reed Danuser in
the amount of $692,671.78 for claims involving Danuser's termination as president and chief
executive officer of the corporations and Leach's breach of a fiduciary duty to Danuser and
requiring IDA Moorhead to pay Danuser $130,727.99 for loans he made to IDA Moorhead. We
affirm.I[¶2] Before 1994, Leach was the
president and majority shareholder of IDA Moorhead, a corporation he created as the sole
shareholder in 1977 to manufacture electronic communications equipment. By 1994, Leach had
handed over the day-to-day operations of IDA Moorhead to its four managers, Danuser, John
Kruse, Steven Lee, and David Gruenhagen. In 1994, Danuser, Kruse, Lee, and Gruenhagen, as
sole shareholders, incorporated IDA Marketing to buy Leach's shares of stock in IDA Moorhead.
Several agreements were executed to effectuate the transaction, including a stock purchase
agreement, a security agreement, a marketing agreement, and a shareholder control
agreement.[¶3] Under the stock purchase agreement between IDA
Marketing and James Leach, Leach sold his 2,421,118 shares of IDA Moorhead to IDA
Marketing for 31 cents per share. The agreement recognized there were 3,794,500 total
outstanding shares of IDA Moorhead. In exchange for Leach's shares of stock in IDA Moorhead,
the stock purchase agreement required IDA Marketing to provide a capital debenture for the total
purchase price of the stock, which was payable in monthly installments with interest at the rate of
eight percent per annum. Under the stock purchase agreement, Leach retained a security interest
in his stock sold to IDA Marketing for the unpaid balance evidenced by the debenture. The
agreement required the stock to be held by an escrow agent. Under the stock purchase agreement,
if IDA Marketing defaulted on any installments and the default remained uncured for 90 days after
written notice, all unpaid principal and interest was due immediately and Leach's stock would be
returned to him. The stock purchase agreement required IDA Marketing to enter into a
shareholder control agreement to protect the interests of Leach and other shareholders selling
stock to IDA Marketing.[¶4] The shareholder control agreement
between IDA Moorhead and IDA Marketing said the corporations had the same board of
directors and the same president and chief executive officer. The shareholder control agreement
named Kruse as president and chief executive officer of the corporations and said the president
and chief executive officer could be terminated for cause as defined by the agreement. Initially, the
five person board of directors consisted of two persons selected by James Leach, two persons
selected by Kruse, and Val Tareski. Leach served on the board of directors of both corporations
at all times relevant to this action. The shareholder control agreement recognized the remaining
shares of IDA Marketing were owned by about 73 other shareholders and IDA Marketing was
offering to purchase all the other shares under the terms of a Confidential Exchange Offer
Memorandum.[¶5] A marketing agreement between IDA
Marketing and IDA Moorhead provided that IDA Moorhead would continue manufacturing
specialized mobile radio equipment and IDA Marketing would market and sell the equipment.
Under the marketing agreement, IDA Marketing's compensation for marketing the equipment
included amounts necessary to meet all of IDA Marketing's obligations, including reimbursement
of salaries and expenses incurred by IDA Marketing, amounts necessary to purchase the stock of
IDA Moorhead under agreements with Leach and other selling shareholders, and amounts
necessary to fund other cash needs required by IDA Marketing.[¶6] IDA Marketing and its shareholders, Kruse, Lee, Danuser, and Gruenhagen,
executed a September 13, 1994 buy and sell agreement governing payment to departing
shareholders for IDA Marketing stock shares "[u]pon the occurrence of a resignation,
termination, death, demotion, and/or disability." The agreement outlined a schedule to determine
the valuation and redemption price for a departing shareholder's stock and a payment
schedule.[¶7] Kruse served as president and chief executive officer
of the corporations from 1994 to 2004, and during his tenure, IDA Marketing's debenture
payments to James Leach for his shares of stock in IDA Moorhead were sporadic. In March 2004,
Leach served IDA Marketing with a written notice of default for the debenture payments due for
the purchase of his stock in IDA Moorhead. After some restructuring and a joint resolution by the
corporations' directors, Leach withdrew the notice of default and Danuser became the president
and the chief executive officer of the corporations. The shareholder control agreement was also
amended to allow IDA Marketing shareholders to transfer their shares without board approval.
Danuser eventually became the majority shareholder of IDA Marketing, and after 2004, he loaned
$97,000 to IDA Moorhead. Nevertheless, between 2004 and 2010, IDA Marketing's debenture
payments to James Leach continued to be sporadic, and during the same time, Danuser received
only a few payments on his loans to IDA Moorhead.[¶8] In 2010,
James Leach claimed IDA Marketing had defaulted on the required monthly debenture payments
to him and requested his full payment for August 2011. Danuser informed Leach the corporations
were not financially able to make the full payment. A special meeting for the joint board of
directors was scheduled for November 17, 2010, and the directors present at that meeting were
Tareski, Gruenhagen, Danuser, James Leach, and James Leach's son, Steve Leach. At the
November 17 meeting, the board voted to terminate Danuser's employment as president and chief
executive officer of the corporations. James Leach, Steve Leach, Tareski, and Gruenhagen voted
for a written corporate resolution stating:that Reed H. Danuser be
immediately terminated from his position as President/CEO [and any other positions of
employment] in IDA Marketing . . . and IDA of
Moorhead . . . pursuant to . . . the Shareholder Control
Agreement dated July 1, 1994, for cause due to Reed H. Danuser having made "improper use of
Corporate funds or property", and/or "self dealing detrimental to the Corporation." Reed H.
Danuser's termination as an employee/officer with respect to either or both corporations is a result
of (a) improper issuance of new shares of stock to himself in IDA Marketing Corporation in
violation of . . . the Shareholder Control Agreement without the consent of
four of the five Directors of the Corporation, and (b) assigning, selling or transferring assets
(other than inventory), tangible or intangible, in excess of $25,000 per year in violation
of . . . the Shareholder Control Agreement without the consent of four of the
five Directors of the Corporation.In addition, Reed H. Danuser has repeatedly caused IDA
Marketing Corporation, . . . to breach its obligations to James Leach [or his
assigns] under (a) the Stock Purchase Agreement dated July 1, 1994, (b) the 8% Capital
Debenture dated July 1, 1994, (c) the Security Agreement dated July 1, 1994, and (d) the
resulting Escrow Agreement(s) involving James Leach's shares in IDA of Moorhead Corporation,
all of which has the effect of adversely impacting the financial position and viability of IDA
Marketing Corporation, a North Dakota corporation.[¶9] According to Danuser, James Leach controlled and orchestrated his
termination as president and chief executive officer of the corporations. James Leach testified,
however, he pursued that course of action because:The meeting I had
with [Danuser] prior to that said that there will be nothin' left if I foreclose on that 90-day deal. If
I would have foreclosed there I would have gotten nothin'. IDA would have been dead. All
employees would have been out of a job, we would have had nothin'. So I had to find something
that I could do that would make it legal for—to get rid of [Danuser] that all four directors agreed
on.[¶10] After Danuser was terminated at
the November 17 board meeting, the directors appointed James Leach president and chief
executive officer of the corporations. On November 24, 2010, James Leach and other
shareholders selling their stock in IDA Moorhead to IDA Marketing declared the payments for
their stock were in default, accelerated the money due on the debenture, and asked the board to
waive any right to cure the default and to allow redemption of any stock held as security for the
debenture. According to Danuser, the total amount necessary to pay James Leach for the IDA
Moorhead stock at that time was $252,576.46. The directors waived further notice of default and
allowed James Leach and other shareholders to repossess the IDA Moorhead stock pledged as
security for IDA Marketing's debt. The IDA Moorhead stock was later sold to a third party for a
total purchase price of $1,180,000.[¶11] Danuser sued IDA
Moorhead, IDA Marketing, James Leach, and the three other directors of the corporations, Steve
Leach, Gruenhagen, and Tareski, alleging Danuser was wrongfully terminated without cause in
violation of his employment contract and the shareholder control agreement. Danuser alleged that
the individual defendants' actions in removing him without cause and freezing him out of
corporate governance breached their fiduciary duty to him and that IDA Moorhead and IDA
Marketing were liable for loans Danuser had personally made to the corporations. Danuser also
alleged a derivative claim on behalf of IDA Marketing to recover damages caused to the
corporations.[¶12] The district court granted Danuser partial
summary judgment, concluding he had a valid employment contract that authorized termination
only for cause and reserving for trial issues about whether he was terminated for cause. The court
also decided Danuser was entitled to partial summary judgment against IDA Moorhead in the
amount of $97,000 for the principal due on his personal loans to the corporation and reserving for
trial issues about the proper credit for interest.[¶13] After a
bench trial, the district court decided Danuser was wrongfully terminated without cause. The
court also determined James Leach personally breached a fiduciary duty to Danuser but the other
individual directors did not breach a fiduciary duty to Danuser, finding James Leach "was
certainly in control of the events that lead to Danuser's termination" and "[a]s a result, Danuser
was 'frozen out', and any reasonable expectations to continued economic benefits were
destroyed." The court said that between 1994 and 2010, James Leach accepted less than full
debenture payments for his stock in IDA Moorhead, but in 2010 he demanded full payments, and
the court found:[James] Leach orchestrated the November 17, 2010,
board meeting that resulted in Danuser's termination. Other board members were informed only at
the last minute, and played no role in shaping the result other than to vote for
it. . . .It is equally clear from his testimony that Leach chose to oust
Danuser in this manner because he was concerned the business would be gutted if he gave the 90
day notice required by the controlling agreements. It is less clear what gave rise to this concern.
Whether Danuser could have paid the balance due if given the opportunity will never be known
with certainty. However, he was entitled to that opportunity, and had paid dearly for it over the
years. According to the records maintained by the corporations' internal bookkeeper, by the time
of Danuser's termination Leach had received debenture payments totaling $805,209.02. This was
more than the total salary Danuser earned during the corresponding period. Furthermore, [James
Leach's wife] was paid an additional $469,774.24 [for her stock].It was not until November
24, 2010, that written notice of default was provided by any shareholder of IDA Moorhead. A
special meeting of the joint board was held on November 29, 2010. Although he was still a board
member, Danuser was provided with no notice of this meeting. Before it was over, Leach had
convinced the other members to remove Danuser from the board, to replace Danuser with a new
board member selected by Leach, to waive further notice of default, and to allow him to
immediately reclaim possession of his IDA Moorhead stock—free and clear of any claims. Leach
was also named as the new president of the company at a salary of $52,800 per year. Clearly all
these events continued to be driven by Leach.Of course, this was the effective end of IDA
Marketing, and all the money remitted by it over the years in the form of debenture payments was
forfeited as a result. On November 28, 2010, Leach was authorized by his new board to reissue
stock in IDA Moorhead to himself and the other shareholders.After taking back the business
in this manner, Leach proceeded to tidy up loose ends and make it ready for
sale. . . .The business Leach seized was financially solid. The income
statements indicated it was generating profits every month, and showed a net profit of $363,298
for the six month period ending January 31, 2011.In April of 2011, Leach reported to the
board the company was in a "strong financial position with $105,000 cash, $582,000 in inventory
and $52,000 accounts receivable." Leach recommend that it was an opportune time to sell, and he
should be placed in charge of the sale effort. Although Tareski abstained from voting, this motion
otherwise passed unanimously.By this point Leach had already retained a broker to make the
sale. It did not take long to find a buyer. . . . The stated purchase price was
$1,180,000.. . . .In summary, following Kruse's departure, Danuser kept the business
going through a combination of hard work, sacrifice and personal commitments. He did so to
further his reasonable expectations to continued employment and to ultimate ownership of a
controlling interest. When times were tough, Leach agreed to accept the debenture payments the
business was able to make. By 2010, for no reasons attributable to Leach, the business had turned
around. It was making a good profit and had become marketable. Despite the fact that debenture
payments were increased to the highest level paid since early 2004, Leach suddenly wanted more.
Using pretext as an excuse, he took steps designed to freeze out Danuser. Because Danuser was
not afforded the 90 day cure period he was entitled to under the terms of the controlling
agreements, this was illegal. Furthermore, good faith and fair dealing require that agreements be
kept, not circumvented. As a result of his wrongdoing, Leach has received a windfall profit that
far exceeds the balance due under the terms of the debenture agreements. The unfair prejudice to
Danuser is manifest. He has lost everything, including his job and his ability to share in the
proceeds from the sale of the business. All this is completely inconsistent with the "high fiduciary
obligations" Leach owed to Danuser "in all mutual dealings." . . . In particular,
Leach breached his duty "of utmost loyalty and good faith."[¶14] The district court determined the corporations and James Leach were
jointly and severally liable to Danuser in the amount of $567,200 for the value of Danuser's lost
interest in IDA Marketing and $47,000 for his salary and benefits before IDA Moorhead was sold
to the third party. The court also decided IDA Moorhead was liable to Danuser for $130,727.99,
which represented the principal plus interest for the loans he personally made to IDA
Moorhead.II[¶15] James Leach argues the
district court erred in finding he breached a fiduciary duty to Danuser. He argues his fiduciary
duty as a director extended to the corporations and shareholders collectively and not to an
individual shareholder such as Danuser. He claims courts in other jurisdictions apply joint and
several liability only in cases where a director is liable for breach of a fiduciary duty to the
shareholders collectively and not to individual shareholders. He argues he did not have a contract
or special relationship with Danuser which directly imposed a fiduciary duty on him and the court
incorrectly assumed he was a co-shareholder with Danuser and erroneously applied fiduciary
duties owed to shareholders.[¶16] James Leach was a director in
both IDA Moorhead and IDA Marketing and Danuser was a director and an officer in both
corporations and was a shareholder in IDA Marketing, a corporation that was formed in an
intertwined transaction for IDA Marketing to purchase IDA Moorhead shares owned by James
Leach and others. The issues raised in this appeal involve a corporate director's duties and
obligations to a shareholder under N.D.C.C. ch. 10-19.1, the North Dakota Business Corporation
Act, which "sets out standards of conduct for officers, directors, and those in control of
corporations, and provides remedies for violations of those standards. See, e.g.,
N.D.C.C. §§ 10-19.1-50, 10-19.1-60, 10-19.1-85.1, 10-19.1-115." Lonesome Dove Petroleum, Inc. v. Nelson, 2000
ND 104, ¶ 29, 611 N.W.2d 154.[¶17] The interpretation of the statutory provisions in
N.D.C.C. ch. 10-19.1 is a question of law, fully reviewable on appeal. Kortum v. Johnson, 2008 ND 154, ¶ 14, 755 N.W.2d 432. Words in a
statute are given their plain, ordinary, and commonly understood meaning, unless defined by
statute or unless a contrary intention plainly appears. N.D.C.C. § 1-02-02. Statutes
are construed as a whole and are harmonized to give meaning to related provisions, but special or
particular provisions control general provisions. N.D.C.C. § 1-02-07. If the language
of a statute is clear and unambiguous, "the letter of it is not to be disregarded under the pretext of
pursuing its spirit." N.D.C.C. § 1-02-05. If the language of a statute is ambiguous,
however, a court may resort to extrinsic aids to resolve the ambiguity. N.D.C.C.
§ 1-02-39.[¶18] In Kortum, 2008 ND 154, ¶ 14, 755 N.W.2d 432 (quoting
Lonesome Dove, 2000 ND 104, ¶ 30, 611 N.W.2d 154), this Court
said "Chapter 10-19.1, N.D.C.C., imposes a duty upon officers, directors, and those in control of
a corporation to act in good faith, and affords remedies to minority shareholders if those in
control act fraudulently, illegally, or in a manner unfairly prejudicial toward any shareholder."
See also Brandt v. Sommerville,
2005 ND 35, ¶ 7, 692 N.W.2d 144; Fisher v. Fisher, 1997 ND 176, ¶ 20, 568 N.W.2d 728; Grinaker v. Grinaker, 553 N.W.2d 200, 202-03 (N.D. 1996); Fisher v. Fisher, 546 N.W.2d 354, 358 (N.D. 1996); Schumacher v. Schumacher, 469 N.W.2d 793, 797 (N.D. 1991); Balvik v. Sylvester, 411 N.W.2d 383, 385-89 (N.D. 1987).[¶19] Subject to limited exceptions not applicable here, the board of directors
manage the business and affairs of a corporation. N.D.C.C. § 10-19.1-32. Under
N.D.C.C. § 10-19.1-50(1), "[a] director shall discharge the duties of the position of
director in good faith, in a manner the director reasonably believes to be in the best interests of the
corporation, and with the care an ordinarily prudent person in a like position would exercise under
similar circumstances." See also N.D.C.C. § 10-19.1-60 (outlining similar
standards of care for officers of corporation).[¶20] Section
10-19.1-85.1, N.D.C.C., generally authorizes a court in this state to grant just and reasonable
equitable relief in an action by a shareholder if a corporation, an officer, or a director violates
N.D.C.C. ch. 10-19.1. Section 10-19.1-86, N.D.C.C., generally authorizes actions by "a
shareholder in the right of a domestic or foreign corporation," and N.D.C.C.
§§ 10-19.1-87 and 10-19.1-88 grant dissenting shareholders' rights and
procedures for asserting their rights, including obtaining fair value for the shareholders' shares in
the event of certain corporate actions. Although denominated as a provision for involuntary
dissolution of a corporation, N.D.C.C. § 10-19.1-115(1)(b)(3), also specifically and
particularly authorizes a shareholder in a closely-held or not publicly-held corporation to obtain
other judicial relief and provides:1. A court may grant any equitable relief
it deems just and reasonable in the circumstances or may dissolve a corporation and liquidate its
assets and business:. . . .b. In an action by a shareholder when it is established that:. .
. .(3) The directors or those in control of the corporation have acted in a manner unfairly
prejudicial toward one or more shareholders in their capacities as shareholders or directors of a
corporation that is not a publicly held corporation or as officers or employees of a closely held
corporation.[¶21] This Court has recognized
that "[a]s a matter of general corporate law, shareholders alleging injury to the corporation must
bring an action on behalf of the corporation within the context of a derivative action," but "in a
closely held corporation a minority shareholder may bring a direct action, rather than a derivative
action, if the shareholder alleges harm . . . distinct from that suffered by other
shareholders of the corporation or breach of a special duty owed by the defendant to the
shareholder." Schumacher v. Schumacher,
469 N.W.2d 793, 798 (N.D. 1991). In Fisher v. Fisher, 546 N.W.2d 354, 358 (N.D. 1996), we upheld a district court's
refusal to allow children to intervene as a matter of right in their parents' divorce action in a case
in which the children were minority shareholders in their parents' closely-held corporation. We
recognized, however, the children were not without remedies,
explaining:Our Business Corporation Act, chapter 10-19.1, N.D.C.C.,
however, provides significant protection for minority shareholders in given situations. See,
e.g., N.D.C.C. §§ 10-19.1-28 (actions to enjoin ultra vires acts);
10-19.1-86 (actions by shareholders in general); 10-19.1-87 (dissenting shareholders' rights);
10-19.1-88 (asserting dissenters' rights); 10-19.1-115 (involuntary dissolution); 10-19.1-116
(involuntary dissolution procedure). We have recognized that minority shareholders in close
corporations have a right to relief when faced with oppressive conduct by the majority. Balvik v. Sylvester, 411 N.W.2d 383, 388 (N.D. 1987). Depending on the harm suffered,
minority shareholders in close corporations may bring derivative or direct actions to obtain relief.
Schumacher v. Schumacher, 469 N.W.2d 793, 798 (N.D. 1991). Under the proper
circumstances, [the children] as minority shareholders have many routes to relief under our law:
intervention in their parents' divorce is not a necessity.[¶22] Section 10-19.1-01(10), N.D.C.C., defines a "closely held corporation" as
"a corporation that does not have more than thirty-five shareholders." In Kortum, 2008 ND 154, ¶ 25, 755 N.W.2d 432 (quoting
Balvik v. Sylvester, 411 N.W.2d at 386), this Court said:"The
typical attributes of a close corporation are that: (1) the shareholders are few in number, often
only two or three; (2) the shareholders usually live in the same geographical area, know each
other, and are well acquainted with each other's business skills; (3) all or most of the shareholders
are active in the business, usually serving as directors or officers or as key participants in some
managerial capacity; and (4) there is no established market for the corporate
stock." In Kortum, at
¶ 27, this Court clarified the existence
of a fiduciary duty in a closely-held corporation was not conditioned on majority or minority
status of shareholders, but whether those in power may improperly work their will on
others.[¶23] IDA Marketing had less than thirty-five shareholders
and was a closely-held corporation, and IDA Moorhead was not a publicly-held corporation.
Danuser was a shareholder of IDA Marketing, which owned stock in IDA Moorhead, and he was
a director and president and chief executive officer of both corporations. James Leach was a
director of both corporations but was not a shareholder in IDA Marketing and was selling his
stock in IDA Moorhead to IDA Marketing. Danuser's action alleged a derivative claim on behalf
of IDA Marketing for damages to the corporation and also alleged a claim for wrongful
termination as well as an individual shareholder claim by him against the corporations and
directors for his damages for freezing him out of the corporations. Danuser's allegations in this
case involve more than a derivative claim on behalf of IDA Marketing and a wrongful termination
claim on his behalf; he also alleged a claim for his damages for being frozen out of the
corporations.[¶24] In Kortum, 2008 ND 154, ¶ 2, 755 N.W.2d 432, we considered
similar claims in the context of an action by Kortum, a shareholder and at-will employee of a
closely-held corporation, against the remaining shareholders for wrongful expulsion from the
corporation. A majority of this Court held that even though Kortum was an at-will employee of
the corporation, her termination triggered an inquiry into whether the corporation acted in a
manner unfairly prejudicial toward her under N.D.C.C. § 10-19.1-115(1)(b)(3) in her
capacity as a shareholder-employee. Id. at
¶¶ 21-42.[¶25] Although Kortum
involved the duties and obligations owed to a shareholder by the other shareholders and this case
involves a director's duties and obligations to a shareholder, the plain language of N.D.C.C.
§ 10-19.1-115(1)(b)(3) authorizes "any equitable relief . . .
deem[ed] just and reasonable in the circumstances" in an action by a shareholder when it is
established that "directors or those in control of the corporation have acted in a manner unfairly
prejudicial toward one or more shareholders" in a closely-held corporation. When the particular
statutory provisions of N.D.C.C. § 10-19.1-115 are considered together in the
context of N.D.C.C. ch. 10-19.1 and Danuser's action against the corporate directors of a
closely-held corporation for his individual damages, we conclude James Leach, as a director, had
a fiduciary duty not to act in a manner unfairly prejudicial to one or more shareholders in the
closely-held corporation under the plain language of N.D.C.C.
§ 10-19.1-115(1)(b)(3). See Kortum, 2008 ND 154, ¶¶ 21-42, 755 N.W.2d 432;
Lonesome Dove, 2000 ND 104, ¶¶ 29-30, 611 N.W.2d 154.[¶26] Leach's reliance on Production Credit Ass'n v. Ista, 451 N.W.2d 118,
121 (N.D. 1990), and cases from other
jurisdictions for the principle that a director's duties and obligations are to the corporation and
shareholders collectively is misplaced. Ista
involved a loan transaction and claims of a fiduciary relationship by borrowers and shareholders of
a lender against the lender, the Production Credit Association; Ista did not involve a claimed freeze out of a
shareholder in a closely-held corporation, which was found to have been "orchestrated" by a
director. See 451 N.W.2d  at 121. In
Ista, this Court declined to adopt the
borrowers' "novel proposition that PCA, in all of its loan transactions, owes a fiduciary duty to its
borrowers arising solely out of their status as stockholders in PCA." Id.[¶27]
Moreover, cases cited by James Leach for a duty to shareholders collectively did not consider
statutory provisions comparable to the particular provisions of N.D.C.C.
§ 10-19.1-115(1)(b)(3) for closely-held corporations in the context of a freeze out of
a shareholder.[¶28] In McLaughlin v. Schenk, 2009 UT
64, ¶ 16, 220 P.3d 146, the Utah Supreme Court recognized that directors' duties of
good faith, prudent care, and the best interests of the corporation coincide with the common law
understanding that officers and directors owe duties to the corporation and shareholders
collectively. The court, however, noted the difference between closely-held corporations and
publicly-held corporations for purposes of assessing fiduciary duties and recognized the different
fiduciary protections afforded to shareholders in closely-held corporations. Id. at
¶¶ 20-23. The court said shareholders in closely-held corporations are easily
subjected to freeze outs, squeeze outs and other forms of oppression and adopted a broader
fiduciary obligation owed to all shareholders in a closely-held corporation. Id. at
¶¶ 18, 23.[¶29] In Redmon v.
Griffith, 202 S.W.3d 225, 233-34 (Tex. App. 2006), the Texas Court of Appeals said a
corporate officer traditionally owes a fiduciary duty to shareholders collectively in a derivative
action, but nevertheless explained that a shareholder may have an individual action for wrongs
done individually to the shareholder regardless of whether the corporation also has a cause of
action.[¶30] The plain language of N.D.C.C. ch. 10-19.1
statutorily recognizes the broader fiduciary duties for directors and those in control of
closely-held corporations for wrongs directed against individual shareholders and provides for
"any equitable relief . . . just and reasonable in the circumstances" in an action
by "a shareholder" when "directors . . . have acted in a manner unfairly
prejudicial toward one or more shareholders in their capacities as shareholders or directors of a
corporation that is not a publicly held corporation or as officers or employees of a closely held
corporation." N.D.C.C. § 10-19.1-115(1)(b)(3). That plain language authorizes
actions by a shareholder against directors when the directors' actions unfairly prejudice "one or
more shareholders." James Leach's argument that directors only owe a duty to the corporation
and shareholders collectively is contrary to the plain language of N.D.C.C.
§ 10-19.1-115(1)(b)(3) and would restrict shareholders in closely-held corporations
from bringing direct actions for a distinct harm suffered by a single shareholder in cases involving
a freeze out of the shareholder. We decline to construe N.D.C.C. ch. 10-19.1 in that manner, and
we conclude that as a director James Leach had a fiduciary duty to Danuser to not unfairly
prejudice him under the plain language of N.D.C.C. § 10-19.1-115(1)(b)(3). The
district court did not err in deciding Leach owed a fiduciary duty to Danuser.[¶31] Whether James Leach breached a fiduciary duty to not unfairly prejudice
Danuser is a question of fact. See Kortum, 2008 ND 154, ¶ 24, 755 N.W.2d 432; Brandt, 2005 ND 35, ¶ 12, 692 N.W.2d 144. A district
court's findings of fact are reviewed under the clearly erroneous standard of N.D.R.Civ.P. 52(a). Brandt, at ¶ 12. A finding of fact is clearly
erroneous if it is induced by an erroneous view of the law, if there is no evidence to support it, or
if, after reviewing all the evidence, we are left with a definite and firm conviction a mistake has
been made. Id. In a bench trial, the
district court determines the credibility of witnesses, and we do not second-guess those credibility
determinations. Id. Under the clearly
erroneous standard of review, we do not reweigh the evidence or reassess the credibility of
witnesses, and we will not retry a case or substitute our judgment for a district court's decision
merely because we may have reached a different result. Id. A choice between two permissible views
of the weight of the evidence is not clearly erroneous under that deferential standard of review.
Id.[¶32] Here, there is evidence from which the district court could conclude James
Leach was responsible for freezing out Danuser's interests in the corporations, which, as found by
the court, involved more than just the wrongful termination of Danuser's employment. The district
court found James Leach breached a fiduciary duty to Danuser and his actions unfairly prejudiced
Danuser by freezing him out of the corporations. There is credible evidence in this record to
support the court's findings. The court weighed the credibility of the witnesses, and we are not left
with a definite and firm conviction the court made a mistake in finding James Leach's actions
unfairly prejudiced Danuser. We conclude the court's findings that Leach breached a fiduciary
duty to not unfairly prejudice Danuser are not clearly erroneous under N.D.R.Civ.P. 52(a).III[¶33] James Leach argues the district court abused its discretion in determining
the remedy for his conduct. He argues the court erred in determining Danuser's damages were a
share of the proceeds from the subsequent sale of IDA Moorhead to the third party. He claims the
buy-sell agreement provides the proper method for valuing shares of the corporations and under
that agreement Danuser was only entitled to about $72,000. Danuser responds the court did not
err in awarding him a fair value for his shares in IDA Marketing because James Leach is not a
party to the buy-sell agreement for IDA Marketing and the agreement is not applicable to the
circumstances in this case. Danuser asserts the court had discretion to grant the damages awarded
him.[¶34] Chapter 10-19.1, N.D.C.C., grants district court's
broad equitable powers to remedy violations of duties by directors. See N.D.C.C.
§§ 10-19.1-85.1 ("If a . . . director . . .
violates this chapter, a court . . . may grant equitable relief it considers just
and reasonable in the circumstances.") and 10-19.1-115(1)(b)(3) ("A court may grant any
equitable relief it deems just and reasonable."). A court has a wide range of discretion to fashion
remedies for a breach of a fiduciary duty, up to and including dissolution of a closely-held
corporation, and we review a district court's determination about remedies under the
abuse-of-discretion standard. Brandt,
2005 ND 35, ¶ 23, 692 N.W.2d 144. "A trial court abuses its discretion if it acts in an arbitrary, unreasonable, or unconscionable
manner, if its decision is not the product of a rational mental process leading to a reasoned
determination, or if it misinterprets or misapplies the law." Id.[¶35]
Leach was not a party to the buy-sell agreement, and although a district court's discretion to
fashion appropriate equitable relief for violations of N.D.C.C. ch. 10-19.1 is not unbridled, under
the circumstances of this case as found by the district court involving the freeze out of Danuser's
interests in the intertwined corporations, we conclude the court's determination of damages was
not a misapplication of the law and was not arbitrary, unreasonable, or unconscionable. We
therefore conclude the court did not abuse its discretion in its award of damages to Danuser for
the breach of the fiduciary duty.IV[¶36] IDA
Moorhead argues the district court erred in deciding James Leach, IDA Marketing, and IDA
Moorhead were jointly and severally liable for Leach's conduct and the court erred in granting
Danuser broader relief than he requested at trial. IDA Moorhead claims that based on the
defendants' conduct, Danuser's damages were divisible among the defendants and it should not be
liable for damages caused by James Leach's conduct.[¶37]
Danuser's complaint sought "whatever other relief that is just and equitable," and we conclude the
relief granted by the district court was not broader than requested by Danuser in his
complaint.[¶38] Corporations are artificial entities that act
through their directors, officers and agents. American Nat'l Fire Ins. Co. v. Hughes, 2003 ND
43, ¶ 16, 658 N.W.2d 330;
Airvator, Inc. v. Turtle Mountain Mfg. Co.,
329 N.W.2d 596, 604 (N.D. 1983). Under
N.D.C.C. ch. 10-19.1, corporations may be liable for the actions of their directors and courts have
discretion to grant "any equitable relief it deems just and reasonable in the circumstances" under
N.D.C.C. § 10-19.1-115(1)(b)(3). See Brandt, 2005 ND 35, ¶ 23, 692 N.W.2d 144. See
also N.D.C.C. § 10-19.1-85.1 ("a court . . . may grant
equitable relief it considers just and reasonable in the circumstances"). We review this issue under
the abuse-of-discretion standard. Brandt,
at ¶ 23.[¶39] Here, both James Leach and IDA Moorhead gained from James Leach's
actions, which are attributable to the corporation. IDA Marketing, which is now defunct, was
closely intertwined with IDA Moorhead and has not contested the court's determination about
joint and several liability. The district court decided James Leach had control of the corporations
when he breached his fiduciary duties to Danuser. We conclude the district court did not misapply
the law in deciding James Leach and the corporations were jointly and severally liable for
Danuser's damages and the court's decision was not arbitrary, unreasonable, or unconscionable.
We therefore conclude the court did not abuse its discretion in holding James Leach and the
corporations jointly and severally liable.V[¶40] We affirm the district court judgment.[¶41] Mary
Muehlen MaringDale V. SandstromAllan L. Schmalenberger, S.J.Gerald W.
VandeWalle, C.J.[¶42] The Honorable Allan L. Schmalenberger, S.J., sitting in
place of Kapsner, J., disqualified.Crothers, Justice,
dissenting.[¶43] The essence of the majority's holding
on Leach's liability to a single shareholder states:"When the particular
statutory provisions of N.D.C.C. § 10-19.1-115 are considered together in the
context of N.D.C.C. ch. 10-19.1 and Danuser's action against the corporate directors of a
closely-held corporation for his individual damages, we conclude James Leach, as a director, had
a fiduciary duty not to act in a manner unfairly prejudicial to one or more shareholders in the
closely-held corporation under the plain language of N.D.C.C.
§ 10-19.1-115(1)(b)(3). See Kortum [v. Johnson], 2008 ND 154, ¶¶ 21-42, 755 N.W.2d 432;
Lonesome Dove [Petroleum, Inc. v.
Nelson], 2000 ND 104, ¶¶ 29-30, 611 N.W.2d 154." Majority opinion at ¶ 25.[¶44] In Kortum v.
Johnson, the defendants did not challenge the application of N.D.C.C.
§ 10-19.1-115 to a shareholder's individual action against a director. 2008 ND 154,
755 N.W.2d 432. Leach makes that challenge, which leads me to respectfully dissent here for
reasons not articulated in Kortum. Id. (Crothers, J., concurring in part and
dissenting in part).[¶45] Section 10-19.1-115, N.D.C.C., is not
properly used here to impose liability on Leach in a shareholder action for damages. Section
10-19.1-115 is titled "Involuntary dissolution." Section 115 is not a general provision but is a
particular law found in chapter 19.1 in the middle of other provisions specifically related to
corporate dissolution. See N.D.C.C. §§ 10-19.1-105 (Methods of
dissolution), 10-19.1-106 (Voluntary dissolution prior to the issuance of shares), 10-19.1-107
(Voluntary dissolution after the issuance of shares), 10-19.1-108 (Filing notice of intent to
dissolve-Effect), 10-19.1-109 (Procedure in dissolution), 10-19.1-110 (Dissolution procedure for
corporations that give notice to creditors and claimants), 10-19.1-110.1 (Dissolution procedure
for corporations that do not give notice to creditors and claimants), 10-19.1-111 (Claims in
dissolution (Repealed)), 10-19.1-112 (Revocation of dissolution proceedings), 10-19.1-113
(Articles of dissolution-Certificate of dissolution-Effect (Repealed)), 10-19.1-113.1 (Filing of
articles of dissolution-Effective date of dissolution-Certificate), 10-19.1-114 (Supervised
voluntary dissolution), 10-19.1-116 (Procedure in involuntary or supervised voluntary
dissolution), 10-19.1-117 (Qualifications of receivers [in dissolution]-Powers), 10-19.1-118
(Action [to dissolve] by attorney general), 10-19.1-119 (Filing claims in proceedings to dissolve),
10-19.1-120 (Discontinuance of dissolution proceedings), and 10-19.1-121 (Decree of
dissolution). This statutory organization does not suggest section 10-19.1-115 applies to anything
but dissolution, and the majority's expansive reading is unwarranted.[¶46] My reading is supported by history showing section 10-19.1-115 replaced
N.D.C.C. § 10-21-16. See 10-19.1-115, Derivation (2012). Section
10-21-16, N.D.C.C., was titled "Jurisdiction of court to liquidate assets and business of
corporation" and provided a process to dissolve and liquidate the assets by shareholder action
when the shareholders or directors were deadlocked, in a creditor's action when the corporation
was insolvent, upon the corporation's filing of statement of intent to dissolve or in an action by the
attorney general. N.D.C.C. § 10-21-16 (1976). Section 10-19.1-115, N.D.C.C.,
clearly added remedies upon dissolution to those formerly available in N.D.C.C.
§ 10-21-16. However, I submit neither section was intended to provide such broad
liability on a director to a single shareholder as now is imposed by the majority.[¶47] Under my application of chapter 10-19.1, I would reverse and not reach
the damages question. If damages are considered, I question their allocation given the modified
comparative fault provisions in N.D.C.C. § 32-03.2-02. This Court has noted, "By
enacting N.D.C.C. § 32-03.2-02, the Legislature 'clearly intended to replace joint and
several liability with several allocation of damages among those who commit torts in proportion
to the fault of those who contributed to an injury.'" M.M. v. Fargo Public School Dist. No. 1, 2012
ND 79, ¶ 7, 815 N.W.2d 273
(quotation omitted). Danuser clearly treated the fiduciary duty claim as a tort--he sought punitive
damages due to the breach. See N.D.C.C. § 32-03.2-11 (exemplary
damages only in action "not arising from contract"). However, this issue has not been briefed and
the majority does not address it so we must leave its resolution for another day.[¶48] Daniel J. Crothers