Opinion ID: 1119905
Heading Depth: 1
Heading Rank: 4

Heading: Failure to Award Damages to the Corporation

Text: Appellants contend that since the trial court found that Johnson violated her fiduciary duty to the corporation, it abused its discretion by failure to award damages for the breach. The trial court refused to award damages because it held that Mr. Harger caused the breach by shutting Ms. Johnson out of the corporation. Appellants argue that the trial court had to award damages against Johnson to the corporation regardless of any misconduct by Mr. Harger. We disagree. Corporate officers and directors have a fundamental duty of loyalty and fiduciary responsibility to the corporation they manage. Squaw Mountain Cattle Co. v. Bowen, 804 P.2d 1292, 1296 (Wyo. 1991); Lynch v. Patterson, 701 P.2d 1126, 1132 (Wyo. 1985). In the small, closely-held corporation, this duty is also reciprocal between the officers/directors of the corporation. The Hargers violated their fiduciary duty to Johnson when they performed a classic squeeze-out against Johnson's interests in the corporation. In their treatise on oppression of minority shareholders, O'Neal and Thompson describe some of the harms which a minority shareholder may endure when squeezed out of participation in a closely-held corporation: The losses which a minority shareholder suffers in a squeeze-out are sometimes catastrophic. He may be deprived of any effective voice in the making of business decisions. Not only that, he may be locked out of the company's premises; and majority participants may be able to withhold from him information on the affairs of the business and on policies being adopted and decisions being made. 1 F.H. O'Neal & R. Thompson, O'Neal's Oppression of Minority Shareholders § 1:03 at p. 4 (2nd ed. 1991) (footnote omitted). Although in this case, Joanna Johnson could not technically be considered a minority shareholder, since she held fifty percent of the shares, and although the corporation was not technically a statutory close corporation, since its Articles of Incorporation did not say that it was, Johnson's position as detailed in the shareholders' agreement, the restrictions placed on sale of her shares, and her lack of business acumen relative to that of Don Harger allowed the Hargers to practice just the sort of oppression described in the treatise. ( See Matter of Villa Maria, Inc., 312 N.W.2d 921 (Minn. 1981), for a similar pattern of abuse by a fifty percent shareholder/corporation president.) O'Neal and Thompson go on to say that Quite commonly when a participant invests in a close corporation he expects to work in the business on a full-time basis. He may put practically everything he owns into the business and expect to support himself from the salary he receives as a key employee of the company. Whenever a shareholder is deprived of employment by the corporation (as he frequently is in these squeeze plays) he may be in effect deprived of his principal means of livelihood. O'Neal and Thompson, § 1:03 at p. 4. The question is whether this squeeze out performed against Joanna Johnson had any bearing on her fiduciary duty to the corporation. First, we detail the scope of her fiduciary duty. It has been generally held that in the absence of a contractual provision to the contrary, corporate fiduciaries, including directors and officers, are free to resign and form a competing enterprise. They must not, however, form a competing enterprise while serving as directors. Furthermore, they must not make use of confidential information particular to the corporation's business which they have acquired therefrom. See e.g. Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476, 483 (Ky. 1991); Parsons Mobile Products, Inc. v. Remmert, 216 Kan. 256, 531 P.2d 428, 432 (1975). This case is subtle, because although Johnson was nominally an officer and director of J Bar H when she began her competing business, she had also been squeezed out of a managerial role. We must therefore analogize to several cases along these lines from other jurisdictions. In Tulumello v. W.J. Taylor Int'l Constr. Co., Inc., 84 A.D.2d 903, 446 N.Y.S.2d 673 (1981), an employee of a close corporation who was only nominally an officer of the corporation was fired after he announced that he would be purchasing a competing business. The sole stockholder, president, treasurer and director of the corporation, William J. Taylor, Jr., then sued the employee/officer for diversion of corporate opportunity. The New York Supreme Court, Appellate Division, in refusing Taylor's claim for damages and injunctive relief, stated as follows:  Public policy strongly militates against sanctions which limit a person's right to earn a livelihood. Considering that Taylor Co. was a close corporation completely run by Taylor and that Tulumello was only a nominal officer thereof, we find no basis to subject him to the strict fiduciary duty of a responsible officer. There is no evidence of disloyalty by Tulumello. Thus, before the close of his employment, he could properly purchase the rival business incorporated upon termination of employment. There is no evidence that Tulumello solicited customers for such rival business before the end of his employment. Also we find nothing in the nature of his employment establishing a fiduciary relationship which prevented subsequent competition, especially in a business where the Dodge Reports acquaint all of potential customers. Tulumello, 446 N.Y.S.2d at 674 (emphasis added and citations omitted). In Voss Engineering, Inc. v. Voss Industries, Inc., 134 Ill. App.3d 632, 89 Ill.Dec. 711, 481 N.E.2d 63 (1985), a father who owned a majority interest in two small, family-held corporations fired his son, who was a corporate director and was employed by one of the corporations as general manager. After his firing, the son arranged with other employees of the corporation to start a competing business, Voss Industries, Inc. The son did not resign as director of his father's corporations until after his own business was underway. The father filed suit which charged the son with breach of fiduciary duty to the corporations. The Appellate Court of Illinois affirmed the trial court's finding that the son had breached no fiduciary duty to his father's corporations. The Court of Appeals stated as follows: James Voss [the son]    never returned to his position at Voss Engineering subsequent to his father's pronouncement. Moreover, he never performed any directorial duties, attended any corporate meetings, or acted for plaintiff corporation in any capacity subsequent to his termination. His only connected action was to use the company credit cards and car, an action completely justified by his family status alone and enjoyed by other non-employee members of the Voss family. James testified that he believed his directorship had been terminated along with his position as manager and officer of plaintiff corporation. We too find that Robert Voss' termination of his son served not only to fire him from his position as officer and manager but also to effectively remove him from his role as corporate director.    Because James Voss was effectively removed in September 1980, prior to the time he began operating a competing corporation, he owed no fiduciary duty to plaintiff.  Voss, 481 N.E.2d at 67 (emphasis added). In Walter E. Zemitzsch, Inc. v. Harrison, 712 S.W.2d 418 (Mo. App. 1986), the Missouri Court of Appeals refused to hold that the vice-president of a closely-held corporation breached his fiduciary duty when he discussed with the corporation's largest customer the possibility that he would leave the corporation to start a competing business. The customer did not give or promise any business to the vice-president prior to the time he left the corporation. The court further noted that, nominally, as an officer, the vice-president had only limited authority in the corporation. He was never furnished with the company's profit statement; he had never been informed of any executive salaries; he was not informed of personnel on the payroll; and he was not authorized to sign the company's checks. Unlike the situation in Opie Brush [ Co. v. Bland, 409 S.W.2d 752 (Mo. App. 1966)], he was not a director or stockholder.    [He] was not in possession of any confidential information. Zemitzsch, at 422. None of these cases is directly on point with the facts in the present case. However, we think the principle to be extracted from them is that the fiduciary duty not to compete depends on the ability to exercise the status which creates it. It is not stretching this principle too far to hold that where a shareholder/director/employee of a close corporation has been wrongfully terminated from employment with the corporation and has been unjustly prevented from fulfilling her function as a director or officer, she can no longer be considered to act in a fiduciary capacity for the corporation. Johnson did not begin her competing business until August of 1988, seven months after the Board of Arbitration decision assigned control of the business to Mr. Harger and over a year after he informed her that she was no longer employed at J Bar H and had no active role or operational responsibility for the corporation. Although Johnson had not resigned as director or officer of J Bar H at the time she began her competing business, and although she did assert her authority as a director with regard to meetings and obtaining copies of business records subsequent to the squeeze-out, she was not allowed any meaningful participation in the management of the corporation during this time period and was improperly shut out of corporate employment. Her position as vice-president and secretary of the corporation had been usurped by others. From an equitable standpoint, we must treat this case as if Johnson had resigned her offices in the corporation when she was shut out of the exercise of them. As a former director and officer, Johnson was under no obligation not to compete when she formed her business. Furthermore, there was not a sufficient showing at trial that Johnson had made use of confidential information that she acquired while a part of J Bar H management. Appellants have claimed that Johnson improperly appropriated the customer list for J Bar H. However, the testimony at trial showed that it was Johnson's experience and reputation as a game processor which brought in customers to J Bar H in the first place. Many, if not most, of the customers she solicited had known her for many years before J Bar H was ever formed. There was not a sufficient showing that Johnson used any confidential customer list to recruit her customers. We therefore affirm the trial court's decision denying recovery to J Bar H of sums earned by Johnson's competing firm. Hargers argue that since it is the corporation which is entitled to recover moneys from Johnson and not the Hargers themselves, their misconduct should not foreclose recovery against Johnson. This argument does not convince us. The corporation was run by the Hargers as virtual sole proprietorship during the time period in question. It cannot now be purged of the taint of the Hargers' mismanagement and unfair practices. It is unfortunate that creditors of the corporation may suffer, but we cannot exonerate the corporation without also unfairly exonerating the Hargers. This we will not do. Cf. Lynch v. Patterson, 701 P.2d at 1130-31 (corporate recovery in close corporation would return funds to control of wrongdoers).