Title: Massey v. Disc Mfg., Inc.
Citation: 601 So. 2d 449
Docket Number: N/A
State: Alabama
Issuer: Alabama Supreme Court
Date: May 15, 1992

601 So. 2d 449 (1992)
Peter MASSEY, et al.
v.
DISC MANUFACTURING, INC., and Quixote Corporation.
89-1715.

Supreme Court of Alabama.
May 15, 1992.
Rehearing Denied July 10, 1992.
Thad G. Long, Gary C. Huckaby and G. Rick Hall of Bradley, Arant, Rose &amp; White, Huntsville, for appellants.
*450 Roderic G. Steakley of Sirote &amp; Permutt, P.C., Huntsville, and Malcolm H. Brooks of McBride Baker &amp; Coles, Chicago, Ill., for appellees.
INGRAM, Justice.
This appeal arises from a preliminary injunction issued in an action alleging usurpation of a corporate opportunity. The appellees, the plaintiffs below, who sought and obtained the injunction in this action, are Quixote Corporation ("Quixote") and Disc Manufacturing, Inc. ("DMI"). Quixote is a Delaware corporation, with headquarters in Chicago, Illinois. It is a holding company for subsidiaries Stenograph Corporation, Energy Absorption Systems, and DMI. DMI, the other plaintiff in this case, was acquired by Quixote on April 30, 1990. From January 1988 to May or June 1990, DMI was known as Disctronics Manufacturing, Inc., and before January 1988, it was known as LaserVideo, Inc.
The appellants, the defendants below, who the plaintiffs say usurped the alleged corporate opportunity and who were enjoined, are (1) Disctronics, Ltd., an Australian holding company; (2) Disctronics Australia, Ltd., an Australian holding company; (3) Disctronics (U.S.), Inc., a Delaware corporation and a wholly owned subsidiary of Disctronics Australia, Ltd.; (4) Disctronics, Inc., a Delaware corporation and a wholly owned subsidiary of Disctronics Australia, Ltd.; (5) Moray Investments, a Cook Island shelf corporation and a wholly owned subsidiary of Disctronics, Ltd.; (6) Memory Tech, Inc. ("MTI"), a Delaware corporation and a wholly owned subsidiary of Moray; (7) Peter Massey, director or chairman of the board and/or chief executive officer of each of the aforementioned corporations; (8) Kevin Donovan, director of several of the aforementioned corporations; and (9) Douglas Adams and David Mackie, each of whom played various roles in the aforementioned corporations. The appellants, except for MTI, will be referred to collectively as the "Disctronics Group" in this opinion. Massey was chief executive officer of DMI from July 1989 until April 30, 1990, when Quixote acquired total ownership; Donovan, Adams, and Mackie all served on DMI's board of directors at various times. From January 1988 to April 1990, the Disctronics Group controlled DMI. The activities alleged to have occurred during this period form the basis of this cause of action.
Prior to 1987, LaserVideo was a wholly owned subsidiary of Quixote. It had two plants, one in Anaheim, California, which manufactured video discs, and one in Huntsville, Alabama, which manufactured audio discs. During this same period, the Disctronics Group was involved in the production of compact audio discs and had operations in Australia, Asia, and Europe. It was looking to expand into the United States. During 1987, it negotiated with Quixote to buy LaserVideo. The negotiations led to an agreement to sell LaserVideo to LaserVideo Acquisition Corporation ("LVAC"), which had been formed by the Disctronics Group for the express purpose of purchasing LaserVideo. The total purchase price was $55.5 million; $29 million was paid at closing, and $26.5 million was due when called anytime after January 15, 1989. Closing took place on January 15, 1988, and LaserVideo became Disctronics Manufacturing, Inc. The sale agreement named LVAC as the purchaser, and Disctronics, Ltd., and Quatro, Ltd. (the parent corporation of Disctronics, Ltd.), as the acquiring companies.
The Disctronics Group was unable to pay the $26.5 million balance owed on the purchase price when called. On January 17, 1989, Quixote sued LVAC; Disctronics, Ltd.; Quatro, Ltd.; DMI; and Disctronics Australia, Ltd., in the Circuit Court of Cook County, Illinois. On February 3, 1989, all defendants, except DMI, consented to the entry of an agreed order stating that the defendants were to pay Quixote the $26.5 million no later than March 3, 1989; the defendants paid $500,000 for the extension. The balance of $26.5 million was not paid by the March 3 deadline, and a default *451 judgment was entered against the Disctronics Group on March 7, 1989.
On March 21, 1989, the judgment was vacated by consent of the parties in favor of a comprehensive settlement agreement; the purpose of the settlement agreement was to provide the Disctronics Group additional time to accomplish financial restructuring in order to raise the cash needed to pay Quixote the balance of the purchase price. The terms of the agreement were as follows: (1) on March 24, 1989, the Disctronics Group was to pay Quixote $1.6 million as advance interest on the $26.5 million from March 3 to October 3; (2) on March 31, 1989, the Disctronics Group was to pay Quixote $1.5 million as a partial payment of principal; and (3) on or by October 3, 1989, the Disctronics Group was to pay $25.2 million, the balance of the obligation. Quixote also received a pledge of 100% of the stock in LVAC and DMI. On October 4, the Disctronics Group, unable to pay the balance owed, defaulted.
Following the October 4 default, the Disctronics Group represented that they had no present ability to pay, but that they had engaged First Boston Corporation, a nationally recognized investment brokerage firm, to assist them in refinancing the Disctronics Group's debt structure.
Prior to this time, the Disctronics Group had tried to refinance their entire world debt, which was approximately $150 million, through Australia and New Zealand Banking Group Limited ("ANZ"). In the fall of 1989, the focus had shifted to an attempt to refinance the debt of DMI only, a debt that totalled $54.9 million ($28.3 million under a credit agreement between DMI and ANZ, plus the amount due Quixote).
The Disctronics Group bargained with Quixote in order to maintain the corporate structure of DMI so that DMI could obtain financing from First Boston. These negotiations culminated in what the parties refer to as the "Work-Out Agreement." The "Work-Out Agreement" stated that it had been entered into because the Disctronics Group had requested an extension of time in order to obtain additional financing, the proceeds of which would be used to satisfy the indebtedness due Quixote. The agreement also stated that Quixote had determined it was in "its best interest under the circumstance in order to maximize the potential for payment, to convert its debt position to that of an equity holder." Under the terms of the "Work-Out Agreement," Quixote exchanged the $25.4 million debt of the Disctronics Group for 49% of the common stock in DMI and 12% of the preferred nonvoting stock in DMI and the preferred stock in LVAC. Quixote gave LVAC an option to repurchase the stock just mentioned if a payment schedule set forth in the agreement was complied with.
The initial trigger date was April 30, 1990, at which time Quixote was to be paid at least $3.3 million in order to extend the Disctronics Group's option to June 30, 1990. If full payment or the extension payment was not made by April 30, the "Work-Out Agreement" further provided that Quixote's preferred stock would gain voting rights and the remaining 51% interest in the common stock in DMI would be sold to Quixote for the nominal sum of $1,000, leaving Quixote as the sole owner of DMI. The "Work-Out Agreement" also provided:
The terms of the agreement also required Donovan to step down as a director of DMI. The trial court found as follows:
(Emphasis supplied.)
The Disctronics Group defaulted on April 30, 1990, and Quixote became the sole stockholder of DMI. The corporate name was changed to Disc Manufacturing, Inc.
The underlying cause of action in this case concerns the Disctronics Group's acquisition of MTI from Mitsubishi, Inc., while the Disctronics Group held 51% of the stock in DMI and Quixote held the remaining 49%. The trial court's order granting the preliminary injunction found the following facts regarding the contacts between the Disctronics Group and Mitsubishi regarding the acquisition of MTI:
In early February 1986, Donovan and Massey formed Disctronics, Ltd., to manufacture compact audio discs. Construction was started on a plant in Braeside Victoria, to service the Australia and New Zealand market. In mid-1986, Donovan traveled to Japan and negotiated with Mitsubishi for the purpose of purchasing mastering equipment for the Braeside plant. During the visit, Donovan learned that Mitsubishi was in the process of building a plant in Plano, Texas, with its joint venture partner, ElectroSound, to manufacture compact discs for the United States market. The trial court found that, during 1986, the Disctronics Group had begun to plan a "global strategy." The court also found that the four key components of this "global strategy" were:
The trial court found that, as part of the Disctronics Group's "global strategy," Donovan had negotiated a "memorandum of understanding" with Mitsubishi in November 1986, which stated, in part, that "Mitsubishi Corporation, Memory Tech Corporation, and Disctronics Limited agree to continue the development of their global relationship for the benefit of all three partners."
In July 1987, representatives of the Disctronics Group met with a representative of Mitsubishi and discussed the proposal that the Disctronics Group acquire the MTI plant in Texas. The trial court found that Donovan's notes from the meeting memorialized two important facts:
The trial court noted that while maintaining momentum in the Mitsubishi negotiations for MTI, Disctronics, Ltd., opened discussions with Quixote about the purchase of its plants in the United States. According to Donovan, those discussions proceeded simultaneously with the Mitsubishi negotiations between July and October 1987 and on parallel tracks. The Mitsubishi negotiations "stalled" in late September, and the Disctronics Group reached an agreement with Quixote to acquire DMI.
Donovan testified that he had maintained continuous contact with Mitsubishi. He stated that he would inquire about MTI and also asked about rumors in the industry that Mitsubishi was having problems with its joint venture partner. In early 1989, *453 Mitsubishi bought out its joint venture partner ElectroSound. The trial court found that Donovan had what it termed as the "first tug on his bait" during a November 1, 1989, telephone conversation with a representative of Mitsubishi, who, at the time, refused to discuss MTI and said only that he might be in a position to talk later, in December or after the first of the year.
The negotiations with Mitsubishi resumed, and in December, Donovan telefaxed an offer to Mitsubishi. Mitsubishi acknowledged receipt of the offer and expressed an interest in further discussion. A meeting took place in Japan between Donovan, Massey, and a representative of Mitsubishi. At the end of the meeting, Donovan, on behalf of Disctronics, Ltd., executed a "Memorandum of Intent," which contemplated another offer. On January 18, 1990, Donovan submitted another proposal to Mitsubishi, and on January 29, Mitsubishi, by a telephone conversation, accepted the Disctronics Group's offer.
On February 23, 1990, Mitsubishi and Donovan executed an agreement providing for the purchase of all MTI stock by Disctronics, Ltd. The transaction was to close March 2, 1990, and no cash was due at closing. The purchase price, $13 million, was to be paid by two notes: (1) the first note, which was due 90 days after closing, for $6.5 million; and (2) an installment note payable between 1992 and 1995 for the remaining $6.5 million. Both notes were secured by a pledge of MTI's real estate and equipment assets. Upon payment of the first note, Disctronics, Ltd., could substitute its guaranty as security for the long-term note, thereby releasing MTI assets from the pledge. Also, the interest of Disctronics, Ltd., in the Mitsubishi contract was assignable.
On March 1, 1990, Disctronics, Ltd., acquired the offshore Cook Island shelf corporation, Moray Investments, and assigned the contract rights and interests under the MTI purchase agreement to Moray.
DMI and Quixote filed a complaint against the Disctronics Group in the Circuit Court of Madison County, Alabama, on June 13, 1990, alleging several causes of action. The complaint alleged, among other claims, that the defendants had diverted business and contracts from DMI to MTI in violation of fiduciary duties and that they had engaged in unfair competition in violation of §§ 8-12-1 et seq., Ala.Code 1975. However, the paramount claim, and the one presented by this appeal, alleged a breach of fiduciary duty by certain defendants in failing to present to DMI and Quixote the corporate opportunity represented by the acquisition of MTI.
On June 19, 1990, Quixote and DMI filed a "Motion for Temporary Restraining Order and Preliminary Injunction." After a three-week hearing, beginning July 2, 1990, the Court entered a preliminary injunction on July 31, 1990.
The trial court found that DMI had a protectable interest in MTI, the acquisition of which the judge termed a "ludicrously good deal." The trial court found that, as fiduciaries of DMI and Quixote, the Disctronics Group had been "grievously unfair" to DMI and Quixote and had, therefore, violated their fiduciary duties by taking for themselves a corporate opportunity properly belonging to DMI. In addition, the trial court found that, unless enjoined, the Disctronics Group would cause DMI irreparable harm by taking DMI's major customer to MTI. Finally, the court found that the appropriate remedy for the usurpation of a corporate opportunity would be the imposition of a constructive trust. Considering all of these factors, the trial court concluded that DMI and Quixote had presented a fair question as to the existence of a right to be protected and had established a substantial likelihood of success on the merits.
The Disctronics Group appealed.
The trial court based its judgment on the evidence presented to it. A trial court's judgment, when based upon findings *454 of fact drawn from ore tenus evidence, is presumed correct and should be reversed
Martin v. First Federal Savings &amp; Loan Ass'n of Andalusia, 559 So. 2d 1075, 1078 (Ala.1990). However, there is no presumption where the trial court has misapplied the law to the facts. "[T]here is a presumption in favor of the findings of fact of the trial court where testimony is [presented] ore tenus. However, such a presumption does not exist where the trial court erroneously applies the principles of law involved." Collier v. Brown, 285 Ala. 40, 43, 228 So. 2d 800, 802 (1969).
When reviewing a preliminary injunction, this Court accords wide discretion to the trial court hearing the motion, and the injunction will not be disturbed on appeal absent an abuse of that discretion. "The trial judge's discretion is a legal or judicial one, subject to review for abuse or improper exercise, as where there has been a violation of some established rule of law or principle of equity, or a clear misapprehension of the controlling law." Martin, 559 So. 2d  at 1078. In order to show an abuse of discretion, the appellant must show that "the trial judge committed a clear and palpable error which, unless corrected, will constitute manifest injustice." Id.
In Martin, Justice Houston set forth the established tests for the trial court's review of a preliminary injunction:
Id. at 1078-79 (citations omitted).
The parties contend that this case is controlled by Delaware law. The established rule of conflicts law is that "the internal corporate relationship is governed by the law of the state of incorporation." See P. John Kozyris, Corporate War and Choice of Law, 1985 Duke L.J. 1, 15. Restatement (Second) of Conflicts of Law § 309 (1971) states the proposition as follows:
Comment (c) to § 309 states:
The Delaware law regarding corporate opportunity was "settled" by two decisions, Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503 (1939), and Johnston v. Greene, 35 Del.Ch. 479, 121 A.2d 919 (1956). See Equity Corp. v. Milton, 43 Del.Ch. 160, 221 A.2d 494 (1966).
Equity Corp., 43 Del.Ch. at 164, 221 A.2d  at 497.
The doctrine of corporate opportunity has been called "a species of the duty of a fiduciary to act with undivided loyalty." Science Accessories Corp. v. Summagraphics Corp., 425 A.2d 957, 963 (Del. 1980). Thus, the relevant inquiry is: "to whom is the fiduciary duty owed and at what time?" Anadarko Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171, 1178 (Del.1988).
At this time, it may be helpful to discuss the nature of the fiduciary duty owed by directors, such as Donovan, as well as by parent corporations, such as Disctronics, Ltd. This duty was described by the New York Court of Appeals as follows:
Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 568-69, 483 N.Y.S.2d 667, 673-74, 473 N.E.2d 19, 25 (1984).
The corporate fiduciary duty is divided into two parts: (1) a duty of care; and (2) a duty of loyalty. The duty of care has been described as requiring officers and directors to act as "ordinarily prudent and diligent men ... under similar circumstances." Briggs v. Spaulding, 141 U.S. 132, 152, 11 S. Ct. 924, 931, 35 L. Ed. 662 (1891). Delaware law provides that
Graham v. Allis-Chalmers Manufacturing Co., 41 Del.Ch. 78, 84, 188 A.2d 125, 130 (1963). One commentator has stated the duty of care as a "duty of attention." See Bayless Manning, The Business Judgment Rule and the Director's Duty of Attention: Time for Reality, 39 Bus.Law. 1477 (1984).
The duty of loyalty, on the other hand, prohibits faithlessness and self-dealing by corporate directors. The duty of loyalty has been explained as follows:
Dennis J. Block, Nancy E. Barton, and Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors and Officers 71 (2d ed. 1988) (quoting Committee on Corporate Laws, American Bar Association, Corporate Director's Guidebook (rev. ed. 1978), reprinted in 33 Bus.Law. 1595, 1599 (1978)).
The corporate opportunity doctrine is one aspect of the duty of loyalty. The Delaware courts have stated that the determination of whether the duty of loyalty was breached when the opportunity was taken depends upon "the circumstances existing at the time [the opportunity] presented itself to [the fiduciary] without regard to subsequent events," and those courts have said "that due weight should be given to [the] character of the opportunity which [the offeror] envisioned and brought to [the fiduciary's] door." Guth v. Loft, Inc, 23 Del.Ch. 255, 277, 5 A.2d 503, 513 (1939).
The trial court made the following findings of fact and conclusions of law:
(Emphasis supplied).
As stated before, Guth, the seminal case regarding corporate opportunity, held that in determining whether the duty of loyalty has been breached, it is important to determine (1) the circumstances at the time of the offer and (2) the offeror's expectations. See Guth, 23 Del.Ch. at 278, 5 A.2d  at 513. Under the facts recited above, it is clear that the trial court found that the opportunity grew from the relationship established by Donovan for the benefit of the Disctronics Group and that Mitsubishi preferred to do business with the Disctronics Group. The issue on appeal, therefore, comes down to whether, given those circumstances, a fiduciary duty of loyalty was owed to DMI and/or Quixote. We hold that it was not.
The opportunity presented by MTI was created by the Disctronics Group's relationship with Mitsubishi that had been established long before the Disctronics Group even began negotiations to buy *458 DMI. Also, with the exception of the period governed by the "Work-Out Agreement," DMI was a wholly owned subsidiary of the Disctronics Group, and no fiduciary duty of loyalty in the context of corporate opportunity is owed by a parent to a wholly owned subsidiary. See Anadarko Petroleum Corp., 545 A.2d  at 1174. Also, under the terms of the "Work-Out Agreement," at the end of the option period either the Disctronics Group would control DMI as a wholly owned subsidiary or they would have no interest in the company. Under either scenario, no fiduciary duty of loyalty was owed.
Quixote claims the Disctronics Group owed it a fiduciary duty, but the Disctronics Group never owed Quixote, a competitor, a fiduciary duty of loyalty. Quixote cites several cases for the proposition that stock pledgees are owed fiduciary duties. See In re Pittsburgh &amp; L.E.R.R., 543 F.2d 1058, 1067 (3d Cir.1976); FDIC v. Kerr, 637 F. Supp. 828, 840-41 (W.D.N.C. 1986); Weingard v. Atlantic Savings &amp; Loan Ass'n, 1 Cal. 3d 806, 83 Cal. Rptr. 650, 464 P.2d 106, 112 (1970); Gibson v. Manuel, 534 So. 2d 199, 201-02 (Miss.1988); Gustafson v. Gustafson, 47 Wash. App. 272, 734 P.2d 949, 953-54 (1987), review denied, 109 Wash. 2d 1024 (1988). After examining those cases, we find that they concerned alleged breaches of the duty of care owed by the corporation, as well as causes of actions based upon the stock pledge agreement. In re Pittsburgh &amp; L.E.R.R., 543 F.2d  at 1067 (action brought to challenge settlement agreements in other shareholder derivative suits that dissipated assets of corporation); Kerr, 637 F. Supp.  at 838 (pledgee could maintain action involving claims under RICO and claims of corporate waste and fraudulent liquidation when the defendant was alleged to have breached "his duty to refrain from doing anything which might injure the value of FDIC's collateral"); Weingard, 1 Cal. 3d  at 818, 83 Cal. Rptr.  at 656, 464 P.2d  at 112 (pledgee of stock has an interest in the stock sufficient to entitle him to bring an action alleging fraudulent conveyance that affects the preservation and protection of the assets and property of the corporation); Gibson, 534 So. 2d  at 202, 203 (a pledgor of corporate stock when in control of the corporation has the affirmative duty to preserve the corporate assets for the benefit of the pledgee; duty of the pledgor was "to conduct his office with ordinary prudence and with all good fidelity to the end that the value of its shares be maintained"); Gustafson, 47 Wash. App.  at 276-78, 734 P.2d  at 952-54 (in an action regarding wrongful disposition of corporate property, a stock pledgee has standing to maintain a derivative action in order to protect her security interest); see also Giblin v. Murphy, 97 A.D.2d 668, 469 N.Y.S.2d 211, 215 (1983) (directors owe a duty of care to protect the stock interest of pledgees, and that duty is breached by "willful, wanton negligence with respect to its assets"); Ashburn v. Wicker, 95 N.C.App. 162, 165, 381 S.E.2d 876, 878 (1989) ("a pledgee of corporate stock has a sufficient beneficial interest to have standing to sue the corporation derivatively for mismanagement"), overruled on other grounds by Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445 (1990). We find these aforementioned cases, cited by Quixote, unpersuasive.
Quixote also argues that, because it owned 49% of the stock in DMI at the time the Disctronics Group executed the purchase agreement, it can claim that the opportunity presented by MTI belonged to DMI, and therefore, to it as a stockholder. This argument, while facially appealing, fails to examine the realities of the situation. Quixote, in the "Work-Out Agreement," stated that the purpose of the agreement was to secure the assets and to prevent bankruptcy by DMI in order to ensure payment of DMI's indebtedness to Quixote. The agreement provided that at the end of the option period, barring extensions, either Quixote or the Disctronics Group would own all of DMI. Also, and we think this important, the agreement stated that the agreement created no relationship such as partnership or joint venture between the Disctronics Group and Quixote.
Under the facts as found by the trial court, Quixote never became a party to be *459 protected from the excesses of the majority shareholder, the Disctronics Group. The opportunity allegedly usurped from DMI was never DMI's opportunity and could not logically be so characterized, given the facts of the creation of the opportunity and the relationship of the concerned parties.
Thus, we hold that Quixote and DMI cannot, as a matter of law, maintain an action for usurpation of the corporate opportunity represented by the Disctronics Group's acquisition of MTI. We hold that the trial court erred in granting Quixote and DMI a preliminary injunction. Therefore, we reverse the order of the trial court and remand this action for further proceedings in accordance with this opinion.
REVERSED AND REMANDED.
ADAMS, HOUSTON, STEAGALL and KENNEDY, JJ., concur.
MADDOX, J., dissents.
MADDOX, Justice (dissenting).
The facts of this case are complex and convoluted. The learned trial judge heard the evidence and entered a 69-page order, which is part of the record on appeal, and in which he made findings of fact that I believe support that order. This Court supplants those findings of fact, and in doing so, replaces the trial judge's judgment on the equities of the case with its own. Therefore, I must dissent.