### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE MARCH 19, 200 2 SESSION

MAURICE SCHWEGMAN, ET AL 

### . v. SHELBY D. HOWARD, III, ET AL


### .

Appeal from the Chancery Court for Davidson County No. 98-2340-I Irvin H. Kilcrease, Jr., Chancellor

No. M2001-00845-COA-R3-CV - Filed October 8, 2002

Maurice Sc hw eg ma n f

il ed a c om pl ai nt al le gi ng cl ai ms fo r b re ac he s o f f id uc ia ry d ut y b y appelle es, Shelby D. Howard a nd Malcolm L. Greeno, in their c apa city as share holders with Schwegman

in a close ly held corpora tion, bre aches of

fiducia ry duty by H oward a

nd Gree no in their capaci ty as officers and directors of the closely held corporation, and for breach of c ontract between Howard and Schwegman

with r espect t

o the assi gnment o f an inte rest in another cl osely

held company. The c

hancellor granted the appellee s' motion for summary judgme

ntand dismissed the case. We revers e as to the

breach of contr act issue and aff irm as to a

ll other is sues.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court

Affirmed in Part, Reversed and Remanded in Part

B UDDY D. P ERRY , S P . J., delivered the opinion of the court, in which B EN H

. C ANT RELL , P.J., M.S.,

AND W IL LI AM C. K OCH , J R ., J. , joined.

James A. Freeman, I

II , and John R. Callcott, Nashville, Tenn essee, f or the appellants Maurice Schweg man, et a

l.

Wallace W. Di etz a

nd H enr y L. Hip ken s, N ash

vill e, T enn ess ee, and

Mic hael J. R

usn ak, Ste

phen J. Peters, a nd David I . Rubin, I

ndianapo lis, I

ndiana, f or the ap pellees Shelby

D. Howar

d, II I, e t al.

OPINION

The question before the co ur t is whethe r the Dav idson Count

y Ch ancery

Court prop erly granted appellees-defendants', Shelby D. Howard ("Howard" ), Malcolm L. Green o (" Greeno"), ByAnda
, LLC ("By

Anda"), and Central Tennessee Ma ck Sales & Service, I

nc. ("Central Tennessee Mack") motion for

summary judgme

nt against the plaintiff, Maurice Schwegman ("Schw egman"). In granting the motion, the chancellor made severa l specifi c finding s. The chancellor found that part of Schwegman's claims are ba rred by the

statute of limitations, part of the claims are barred by equitabl e principles, and that the claim for usurpation of corporate opportunity is barred because the-2-

corpora tion was f inancia lly u nable to exercise the oppor

tunity . As to thes e ruling s, we sustain the chancellor and affirm the judgment. Schwegman

also claimed that Howard breached an a ssignm e nt agreement. Finding that Schwegman

offered no consideration for the contra ct and that Schwegman failed to com pl y with certain condition s prece dent, the chancellor d ismissed th

e claim. We

disagr ee and r emand thi s issue for further consideration.

Procedural History On August 3, 1998, Schwe gman fi le d his verified complaint in the Chancery Court of Davidson County, seeking injunctive relief and other equitable remedies aga inst Howard, Greeno, Rick Snellin gs, Johnny

McBride , Central

Tenness ee Mack , Central India na Ma ck Sales and Services
, Inc., and By

Anda. The case

was removed to the United States District Court, Middle District of Tennessee, Nashville Division, but was later remanded to th e C ha nc er y Co ur t o f D av id so n C ou nt y. Following the remand of the action to the Davidson County Chancery Court, Rick

Snellings, Johnny McBride, and Central Indiana Mac k Sal es & Service, I

nc., filed a motion to dismiss for lack of
p ersonal jurisdiction, and Howard, Greeno, and Central I ndiana Mack filed a motion to di smis s counts I through VI

of the complaint on the grounds of forum non- conveniens . Because the court lacked personal jurisdiction over Snelling s, McBr

ide, and C entral I

ndiana Ma

ck Sales a nd Servic es, Inc., the chancellor granted their motion to dismiss. Pursuant to the doctri ne of forum nonconveniens
, the chancellor concluded that counts I through VI

could be more c onvenien

tly t ried in a court of competent jurisdiction in Indiana, a nd those counts were dismissed without prejudice. After the dismissal, the two remaining ca uses of act ion involved an allegation by Schwegman that How ard and G

reeno br eached fiducia ry duties, bo th as stockholdersand dire ctors of Ce ntra l Tennessee Mack, by

formi ng By Anda and having By Anda own the land upon which Central Tennessee Mack' s facilit y w as built, a

nd by the alleged improp er remo val of Sc hwe gman as president of Central Tennessee Mack. The remaining cause of action alleges that Howa rd agreed to assig n a 10% sha

re of B yA nda to Sch

wegma n and bre ached th

e agre ement.

Factua l Background Sc hwegman

had twen

ty y ears of manage ment exper

ience w ith Mack tr

uck dea lersh ips

. When the oppor

tunity to purcha se a Mack truck dealership in the Nashville area arose, Howard a nd Greeno approached Schwegman and of fered him the opportunity to be pr esident of a newly

formed corporation along with a percentage of stock. T he owner sh ip of the newly for med corporation, Central Tennessee Mack, was as follows: Howar d 40%, Greeno 40%, and Schwegman 20%

. As a part of the arrange

ment for the dealership, the parties were required to build some new facilities for

the operation of the dealership. The parties did not discuss the ownership of the ne w facilitie s, but it is apparent that Schwegman assumed that Central Tennesse e Mack w ould own the new operating facilities. Without Schwegman's knowledge
, Greeno and Howard set up a limited liability investment

co mp an y, ByAnda . Howard held a 50% interest in By Anda and Greeno's daug

hters held a 25% interest each. Greeno insists that By Anda was set up for estate planning purposes. The property for

the o p eration of the dealership was located in the L avergne, Tennessee, a

rea. Central Tennessee Mack did not have the funds to purchase the propert

y no r the abi lity

to purchas e-3-

the property without

the person al guarantee of the parties. G reeno wrote a check to Central Te nnes see Mack for the purchase of the land and note d on the check that it was a loan. Greeno claims that the check was given to Central Tenne ssee Mack, but the inten tion was f or the pr operty to be owned by B yAnda. Without Schwegma n's knowledge, the land in question was transferred by Quit Claim Deed from Central Tennessee Mack to By Anda. After he learned that

the land and operating facilities would be owned by ByAnda
, Schwegman

confronted Greeno and Howard. Sch wegma n believed that he was entitled to a 20% interest in ByAnda. B elieving that he was going to get an interest in By

Anda, Schwegman

assisted ByAnda in the loan application process for the building of the opera ting facilities. Howard did agree
to assign 1 0% of his in

terest in By Anda to Schwegma

n, and thisassignm

ent is the sub

ject of the breach of contr act act ion alleg ed in the c omplaint.

Standard of Review Rule 56 .0 4 o f t he Te nn es se e R ul es of Ci vi l P ro ce du re pr ov id es th at su mm ar y j udgme nt is appropriate and should be granted if:

Th e plea dings, depositions, answers to interrogatories, and a dmissions

on file, tog ether wi

th affida vits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment as a matter of law.

The party seeking summary judgment has the burden of establishing that no material factua l issues exis t, and the moving party is e ntitled to a judgment as a matter of law. Byrd v. Hall , 847 S.W.2d 208, 215 (Tenn. 1993). Trial courts are required to review the evidence in the light most favorable to the nonmoving party

and must dr

aw all re asonable

infere nces in favor of the nonmoving party

. Byrd , 847 S.W.2d at 210-11. Becau se the ca se comesto this court on purely a que stion of law, this court must conduct a de novo review with no presumption of correctness. Sullivan v. Baptist Memorial Hospital , 995 S.W.2d 569, 571 (Tenn. 1999) ; Cowden v . Sovran Bank/Centr al South , 816 S.W.2d 741, 744 (Tenn. 1991).

Statute o f Limitat ions None of the parties challenged the chancellor' s choice of law rulings . Substanti ve issuesin this dispute are governed by

Indiana law, and the pr

ocedural matters are governed by Tennessee law. See State v. Early , 934 S.W.2d 6 55, 657 (Tenn. Ct. Ap p. 1996). St a tute of limitations is considered procedural issue. Cronin v. Howe , 906 S.W.2d 910, 913-14 (Tenn. 1995). Therefore, the one yea r statute of limitationsimposed by

T.C.A. §48 -18-601( 2000) is applicable. See Mike v. PO Group, Inc.
, 937 S.W.2d 790, 792-93 (Tenn. 1996). The core of

the contr oversy in this cas e cente

rs on th e tr ansfer of the real estate from Centra l Tennessee Mack to By

Anda. Schwegman

contends that he was enticed to move to

Davidson County to operate the Ma ck truck business in return for an offer of 20% interest in Central Tenne ssee Mack and the opportunity to be the
compa ny's president. He contends that a central and vital part of Central Tenne sse e Mack was the ownersh ip of the la

nd and fa

cilities. The land i n ques tion was tr ansfer red wi thou t Sch wegman 's-4-

knowledge. He asse

rts that the land tr

ansfer constitute s "self dealing transactions" w hich breaches Greeno and Ho ward's fiducia ry duties as directo

rs. Schwe gman ad

mits that he learned of the transfer of the real estate from Central Tennessee Ma ck to ByAnda

on or about June 13, 1997. The complaint

was not fi led untilfourteen months later. Therefore, the c hancellor found that Schwegman' s cause of action for breach of fiduciary duties of the directors based on the real estate tra nsfer was barred by

the statute of limitations found in T.C.A. §48-18-601(2000). Schwegman asserts that the appellees ar e estopped from asserting the statute of limitations. He argues that Howard

repeatedly

assured him that he would be given a proportionate shar e in the new ly formedcompany, B yAnda. He asserts that his delay in filing suit was based solely on

his reliance of the appellees' representations. The appellees argue that

the princ iple of estoppel does not apply in this case . They ar gue that in order for the principle to apply , one party must bel ieve "that the other party is going to pay

or otherwis e satisfy

the claim of the fir st party , and in re liance o n that re

present ation the first par ty de la ys in filing suit . . . ." See Bernard v. Houston Ezell Corp. , 968 S.W.2d 855, 862 (Tenn. Ct. App. 1997). They correctly argue that the action involved here is a derivative suit, and the rights belong to Central Tennessee Mack, not

Schwegman. See Dotlich v. Dotlich , 475 N.E.2d 331, 339 (Ind. Ct. App. 1985). Assuming arguendo that misleading statements were made to Schwegman, caus ing him to believe that he would receive a persona l i nterest in ByA

nda, his reliance upon these misleading
statemen ts cannot be used to extendthe derivative cause of action belonging to Central Tennessee Mack. Thus, the parties are not estopped from asserting the statute of limitations. Schwegman

also asse rts that Greeno and Howard breac hed their fiduciary

duties as directors of Central Tenness ee Mack

by t erminating him aspreside nt and re placing him with an inexperienced and unqualified family member. This count wa s brought within one ye ar and is not barred by the statute of limitations

. The dispo sitive issu e is Schwe gman' s termina tion and not th e hiring

of his re placeme nt. Schwegman acknowledge s he was an employ ee at will. When employment is at will, e

mploy ment is terminab le at any time, with or without cause
, by either party

. Orr v. Westminster Village North, Inc
., 689 N.E.2d 712, 717 (Ind. 1997).

Equitable Principles The statute of

limitations forbreach

es of fid uciary duties amo ng joint s harehol ders is thr ee years. See Mik e v. PO Group, Inc., 937 S.W.2d 790, 796 (Tenn. 1996). Although this action was bro ugh t within the three-y ear time period, the chancellor determined that Schwegma n's claims were barred by equitable principles. Schwegman

asserts t hat the sh ares in Ce

ntral Te nnessee Mack hav e been d

iminis hed in va lue by the rea l estate t ransac tion, and t

he trans action wa s detrime nta l to the corporation and a breach of Howard and Greeno's fiduc iary duty . Schwegman seeks equitable relief. Appellees insi st th at Schwegman acquiesced and pa rticipated in the same transactions about which he complains. They a rgue that established principles of equity require that "[h]e

who seek s equity
must do equity," Will ig v. Dowe ll , 625 N.E. 2d 476, 484 ( Ind . Ct. App. 1 993), an d that a pa rty is estopped from contesting conduct when the party was silent or a

cquiesced to the conduct in the face of a duty of g ood faith to speak or act. Kahf v. Charle ston South A

partments , 461 N.E.2d 723, 734 (Ind. Ct. App. 1984). They a ssert that "shareholders in a close corpor ation stand in a

fiducia ry relation ship to each other. " Barth v. Barth , 659 N.E.2d 559, 561 (Ind. 1995).-5-

Schwegman

argue s that th e doc trine of unclean hands is not applicable because he did not particip ate in the transfer of the property from Central Tennessee Mack to By Anda. He asserts that for the doctrine of unclean hands to app ly, his actions w ould have to be directly

related to the re al estate transfer. The appe

llees a sse rt that Schwegman's hands are unclean, because he signed the guarantee application for By

Anda after

he knew that the real estate had been tra nsferred, and he failed to bring a ny suit on behalf of the corporation until he discovered that he would not be given an interest in By Anda. We agree with the chancellor' s conclusion. Schweg man's concer n was for himself and not Cen tral Tenness ee Ma ck. He is not in a position to seek equitable relief for the alleg ed breach of fiduciary obligations. Schwegman was willing to forge t about the interest of Central Tennessee Mack, provided he was compensated.

Usurpation of Corporate Opportunity Schwegman's counsel arg ues that Central Tennessee Mack signed the purchase agreement f

or the property in que stion, paid the earnest money on the purchase contract from its account, and actually paid for

the property f

rom its account. He argues, theref ore, that Central Tennessee Mack purchased the property , and the transfer of the property from Central Tennessee Mack to By Anda was the usurpation of a business opportunity of Central Tennessee Mack. Notwithstanding the foregoing, all of the parties agree that the key to purchasing the land and the fina ncing o f the con struction

was the p ersonal

guara ntee and loan of G

reeno. S chweg man simply contends that the loan guarantee should have be en given to Central Tennessee Mack a nd not ByAnda

. We agree with the chancellor' s finding that there was no corporate opportunity to be usurped. The "corporate opportunity doctrine" requires that, "' if there is presented to a corporate off icer or director a business opportunity w hich the corporation is financially able to undertake . . . in the line of the corporation's business and is of practica l advantage to it . . . the law will not permit [the director] to seize t he opportun ity for himself.'" Kirtley v. McCelland, 562 N.E.2 d 27, 33 (I nd. Ct. App. 1 990) ( quot ing Guth v. Loft, Inc. , 5 A.2d 503, 510-ll (Del. 1939)). To sustain Schwegman's arg ument, the court would have to find that Greeno had an obligation to use his personal funds to guarantee the oblig ations of Central Tennessee Mack. Generally , a director of a corporation has no duty to use personal funds to guarantee the oblig ations of a corporation. Urban J. Alexander Co. v. Trinkle, 224 S.W.2d 92 3, 927, (K y. 1 949); Hart v. Be ll
, 23 N.W.2d 37 5, 382 (Min n. 1946); Frank Lerner & Assoc., Inc. v. Vassy, 599 N.E.2 d 734, 738 ( Ohio Ct. App. 1991). Greeno provided the money for the transaction, and the chancellor cor rectly found

no us ur pa ti on of

a c or po ra te op po rt un it y.

Assignm ent of Inte rest in ByA nda It appears that Schweg man is not concerned about which entity , either Central Tennessee Mack or B yA

nda, ownsthe land a

nd opera ting fa cilities a s long ashe has a 2 0% intere st in the en tity owning the facilities. Schwegman made his conte ntions clear to all the parties. Schwegman was offered the opportunity to purchase 20% of ByA nda, if he paid 20% of the money to fund the

loan of G

reeno. H oward e

xecuted a n assign ment of 10 % of his int

erest in ByAnda to Schwegman. At the same time Schwegman r eceived the assignment, he rece ived a copy-6-

of ByA nda's operating ag

reement and a consent to membership by assignee of interest in By Anda. Howard signed the consent to membership, but the other two member s did not. Howard insists that the claim for breach of the contrac t must fail because Schwegman offer ed no consideration for the contract and the contempora neous document rule requires a construction of all writings which were submitted to Schwegman as a part of the transaction. Howard insists that the documents, when read together, esta blish a condition precedent to the agreement whic h was not fulfilled. The chancellor agreed with Howard's contention. It is not disputed that mutual assent between the parties is nec essary to for m a contract, Pinnacle Computer Service Inc., v. Ameritech Publishing, Inc. , 642 N.E. 2d 1011, 10 13 (I nd. Ct. App. 1994 ) and "[t]h

e intent r elevant in contra ct matter s is not the p arties' subjectiv e intents but their outward mani festations of it." Holloway v. Giganti, Inc. , 540 N.E.2d 97, 99 (Ind. Ct. App. 1989). Howard insists that

the conte mporane ous docume

nts rule isapplica

ble to esta

blish the p arties' intentions. The cont emporaneous doc ument rule require s that writings, w

hich rel ate to the

same transaction, even if they

are executed at a different time, must be construed tog ether to determine the
contract. Geico Ins. Co. v. Ro well, 705 N.E.2d 476, 482 ( Ind. Ct. App. 1999). Howard insists that the contemporaneous documents rule requires that the assig nment and the consent to membership be construed together. He arg ues that assent by the other members of By

Anda is a condition precedent which has not been completed. A condition precedent is a condition which must be pe rformed before the agreeme

nt of the parties becomes binding, or a condition which must be fulfilled befor e the duty to perform a

n existing contract arises. Barrington Management Co. v. Paul E. Draper Family Ltd. Partnership, 695 N.E.2d 135, 141 (Ind. Ct. App. 1998). Howard insists that , under I ndiana la w, an ass ignee o f an inte

rest in a l imited liab ility company ca

n become a member only if other members unanimously a gree absent a provision in the operating agree

ment otherwise. Ind. Code. Ann. § 23-18-6- 4(b)(2000). The operating ag reement of ByAnda contained no provision dealing with the admission of new members. There fore, Howard contendsthat unan

imous cons ent of all memberswas req uired fo r Schweg man to re ceive a

n intere st in ByAnda. G

reeno's children never c onsented. Simply stated, Howard is insisting that a transf er of a 10% interest in By Anda to Schwegman was conditioned upon the consent of the other members. Howard insists that Schweg man understood this condition. Schwegman argues that the issue is one of assignment of shares rather than transf er of shares. He concedes that the other members of B yAnda would have to execute the consent for there to be a transfer of shares, but he contends no consent is required for an assignment of shares. Schwe gman insists that Indiana law draws a substantive distinction between the assignment of shares and the transfer of shares in a limited liability company conte

xt. See Ind. Code Ann. § 23-18-6-1 and § 23- 18-6-3. He argu es that I

nd. Code A

nn. § 23-1 8-6-3(a

)(1) all ows an as signmen

t in a limite d liability company either

in whole or part unless prohibited by the operating agree

ment. In the case of a

n assignment, the assignee would be entitled to "r eceive only

the distributions to which the assignor would be normally entitled" . Ind. Code Ann. § 23-18-6-3(b)( 2). The assignor continues to be a member and exercise the rights of the member a nd such an assignment does not dissolve the limited liability corporation. I

nd. Code Ann. § 23-18-6-3(b)(4)and (3).-7-

Howard further insists that there was no consideration for the assignment of shares and that Schwegman, by

judicial admission, conceded the lack of consideration. Schweg man argues that Indiana courts are

generally hesitant to inquire into the adequacy of consideration. See Bernstein v. Glavin 725 N.E.2 d 455, 460- 461 (I nd. Ct. App . 2000). Sc

hwegma n also ass erts that

this is especially true where consideration of indeterminate va lue is agreed upon by

the parties. Harrison- Floyd Far m Bureau Coop. v. Reed , 546 N.E.2d 855, 857 (Ind. App.1989). We find that the Indiana courts would not have inquire d into the adequacy of the consideration given the facts of this case. Whether the agreement between Schwegman and Howard was an assignment of shares or a tra nsfer of shares can only

be determined after an evidentiary hearing . The con

tract wa s prepar

ed by Howard a

nd on a que stion of int

erpret ation infe rence i s against the drafter of the document. I f the chancellor finds that Howard's position overc omes the inference or other relevant f acts and that the consent of other members is required, then H oward prevail s. Howev er, the i ssue can not be re solved on m

otion for summary judgmen t. Finally , the appe

llees insi st that the

breach of contr act cla im is barr ed by the "me nd the hold doctrine". See National Home and Chain Company v. Robertson, 161 N.E. 851 (Ind. Ct. App. 1928); Governmental Inter-Insurance Exchange v. City of Angola, 8 F.Supp.2d 1120 (N.D.Ind. 1998); Harbor Insurance Company v. Continental Bank Corporation , 922 F.2d 357 (7th Cir. 1990). "In Habor , Judge Posner explained that 'mend the hold doctrine' ' is the name of a common law doctrine that limits the right of a party to a contract suit to change his litigating position. I n fact the phrase is a nineteenth century wrestling term, meaning to get a better grip (hold) on your opponent.' Harbor , 922 F.2d at 362." Governmental Inter-Insurance Exchange, 8 F. Supp. 2d at 1128. Judge Posner says that the doctrine is a "cousin to judicial estoppel" and imposes on the parties to a contract a duty of good faith. Harbor, 922 F.2d at 357. Whether Howard has chang ed positions to the extent the court will find he violated a duty of good f aith dealing, as required by the "mend to hold doctrine" can only be determined after a hearing . Whether there was an assignment or transfer agreement, supporte d by adequa te consideration, can only be determined after a hearing on the merit s. There

fore, w e rever se and re

mand on the

contract issue an d affirm as to all ot

her issue s.

_________________________________ BUDDY D . PERRY