Court Opinion

ID: 9768849
Source: CourtListenerOpinion
Date Created: 2023-08-29 13:53:07.38808+00
Date Added: 2024-06-11T15:03:33.912339
License: Public Domain

HOOD, Special Justice.
This appeal arises from an action for fraud and wrongful discharge1 filed in the Kenton Circuit Court by an employee/shareholder of the closely-held corporation that discharged him. The relevant facts that pose the issues in this appeal may be summarized as follows.
*605In the early 1950s movant James Estep (“Estep”) and respondent Joseph Werner formed a partnership engaged in the manufacture of decorative iron railings. The business was incorporated on December 24, 1963, and became known as W & E Welding Company, Inc. (the “Company”). Joseph Werner and Estep were each issued forty-nine shares of common stock, and Mildred Werner, wife of Joseph Werner, was issued two shares of common stock. Mildred Werner became the President, Joseph Werner, the Vice President, and Es-tep, the Secretary of the Company. (Hereinafter Joseph Werner and Mildred Werner are jointly referred to as the “Werners.”)
The Company operated out of industrial buildings constructed on three lots owned by the Werners.. The Werners leased the three lots and the buildings thereon to the Company. The leases for the property were signed by Joseph Werner and Mildred Werner, individually, as Lessors, and by the Company, as Lessee, by Mildred Wer-ner, as President. Testimony was presented at trial that the corporate minutes of the Company were altered to evidence the Company’s obligations to pay rent to the Werners. However, unrebutted testimony from Estep’s own witness, Austin Mann, a real estate appraiser, indicated that the rent received by the Werners from the Company was less than its fair market rental value.
In the 1970s, the Company hired David Werner and Bruce Werner, sons of the Werners, to work for the company. The Company began experiencing financial difficulties in the early 1980s due to a decline in the demand for its product. In 1981, Estep was terminated from his employment with the Company. The trial court found that at the time Estep was terminated “everyone was terminated,” including Joseph Werner. Only Mrs. Werner remained on the payroll.
In January of 1983, David Werner formed a Company known as AOIF, conducting essentially the same business as W & E Welding. In March of 1983, the Wer-ners, over the objections of Estep, set in motion plans to liquidate W & E Welding. In September of 1983, the Company went into bankruptcy.
Within one year from the formation of AOIF, but after the bankruptcy of the Company, AOIF assumed the contracts of the defunct W & E Welding, purchased from the Company’s trustee in bankruptcy all of its industrial equipment, and operated its business at the former location of W & E Welding. Many of the employees of W & E Welding, including Joseph and Mildred Werner, also became employees of AOIF. The court made no finding that the Wer-ners, or their sons, failed to use their best efforts to make W & E Welding succeed or attempted to direct the Company’s business to the newly formed AOIF.
The Special Commissioner made additional findings relating to the nature of the relationship between the Werners and Es-tep as shareholders in a closely-held corporation. The Special Commissioner stated that the relationship between the parties was similar to a partnership:
Although the facts indicate that the relationship between the Plaintiff, Estep, and Defendants, Joe Werner and Mildred Werner, is that of minority shareholders, it is found that this closely held corporation and the relationship between the parties is similar to a partnership relationship.
After a two-day evidentiary trial, the Special Commissioner ruled that the actions of Joseph Werner in terminating Estep constituted a violation of Joseph Werner’s fiduciary duty to Estep as a fellow shareholder in a closely-held corporation. As damages, the trial court awarded Estep lost wages from 1981 (the date of termination) through 1985. In addition, Estep was awarded punitive damages from the Werners for their failure to disclose to him that the Company leased property from the Werners.
The Court of Appeals reversed the judgment as to both awards. We affirm the decision of the Court of Appeals.
I.
The first issue before the Court is whether the trial court properly found that Jo*606seph Werner breached his fiduciary duties as a shareholder to his fellow shareholder, Estep, in a closely-held corporation by terminating Estep from his employment with the Company. It should be noted at the outset that movant did not claim “breach of fiduciary duty” in connection with the termination of his employment with the Company in the original complaint. Count Three of the Third-Party Complaint alleges breach of an employment agreement. Even the Post-Trial Brief of the movant does not address breach of any type of fiduciary duty but refers to an employment agreement between Joseph Werner and Es-tep, stating:
However, it is not the verbal agreement between these two partners upon which this plaintiff relies for James Estep's termination was but one of a fraudulent plan perpetrated upon him by the three defendants and his termination is wrongful for that reason.
The report of the Special Commissioner is the first reference to Estep’s termination as a breach of fiduciary duty. We do not believe that this action should be decided in terms of breach of fiduciary duty as the facts of this case do not justify such a holding.
The Court of Appeals did not specifically address this issue but held that KRS Chapter 271A2 is “the appropriate chapter to apply in these business dealings as this is clearly a corporation under the laws of Kentucky.” We do not deny the applicability of KRS 271A to corporations but do note, however, that there may be certain nonstatutorily imposed fiduciary duties that exist among shareholders in closely-held corporations. For example, in Aero Drapery of Kentucky, Inc. v. Engdahl, Ky., 507 S.W.2d 166 (1974) the court held that a fiduciary duty is owed by a director to the corporation even though such a duty is no longer imposed by statute. In Aero, the plaintiff alleged that a ten percent shareholder, director and treasurer of the company occupied a fiduciary relationship to the company. The court, referring to a prior repealed statute that imposed such a duty, stated, “Even without this statute there existed a fiduciary relationship between Engdahl [the stockholder, officer and director] and Aero [the company].” Id. at 168. Movant has cited numerous cases and jurisdictions outside of this Commonwealth that recognize the existence of fiduciary duties of utmost good faith, fair dealing, and full disclosure among shareholders in a closely-held corporation. However, we feel it is not necessary to discuss the existence and extent of such duties in the State of Kentucky in this opinion. The trial court incorrectly based its wrongful discharge award on “breach of fiduciary duty.” Based upon the facts preserved in this appeal there is no justification for finding a breach of any type of fiduciary duty.
The Special Commissioner made the following findings relating to the termination of Estep from his employment. First, a significant downturn in the Company’s business resulted due to a lack of demand. The Special Commissioner stated that “this was a very real business downturn and not one created by David Werner or his parents.” Even more significant, the court found that in 1981, when Estep was discharged from the Company, Joseph Werner was also discharged. Certainly, Joseph Werner did not owe Estep a fiduciary duty to keep Estep employed when Werner, and numerous other employees, were also terminated from employment.
In addition, the Special Commissioner determined that the purchase of the assets of the Company by David Werner out of bankruptcy was legitimate. The sale was supervised and approved by the bankruptcy court, and the sale did not preclude participation by other bidders. Moreover, there was no evidence that there was anything improper about the bankruptcy.
The trial court seemed to base its decision on the fact that Werner and Estep “made a commitment over twenty five years ago that each would remain employed so long as there was a company and that Joe Werner had a fiduciary duty to his partner, James Estep, to assure that James *607Estep would be given the same opportunity as he in running the business and to live up to the agreement that was entered into more than twenty-five years ago that each would remain employed so long as there was a company.”
Even if such an agreement could be enforced as fiduciary duty or a contractual relationship, the fact remains that Werner and Estep were both terminated from the Company in 1981. Joseph Werner’s subsequent employment with AOIF does not constitute any type of breach of fiduciary duty. By the time Joseph Werner became employed with AOIF, W & E Welding Company Inc. was no longer in business; there was no company with which to be employed. Moreover, Estep failed to show that there was any fraud or violation of fiduciary duty by the defendants in connection with the sale of the corporate assets by the trustee in bankruptcy to their son, David Werner. Based upon these facts, we find that even if the Werners and Estep owed each other some type of fiduciary duty, the facts do not support a finding of a breach of said duty and, further, no wrongful discharge.
II.
The second issue before this Court is whether the Court of Appeals properly reversed the trial court's award of punitive damages for “failure to disclose personal dealings.” Evidence was presented at the trial court level that the Company leased real estate from the Werners throughout the years and that the rental amounts charged to the corporation were concealed from the movant. However, the Commissioner made no finding that the corporation or Estep sustained any damage from the leasing of the property from the Werners. In fact, Estep’s own witness testified that the fair rental value was about $2,000 per month. When informed that the Werners had never charged more than $667.46 per month, the witness agreed that the corporation was getting a bargain. In addition, the Special Commissioner found that the Company had a history of sloppy record keeping and that Mr. Estep never objected to these business practices. The rule of law recognized in this state is that, “if the plaintiff has suffered an injury for which compensatory damages might be awarded, ... he may in a proper case recover punitive damages.” Lawrence v. Risen, Ky.App., 598 S.W.2d 474, 476 (1980). Movant failed to demonstrate that he suffered any injury. Thus, the award of punitive damages was improper.
Based upon the foregoing, the decision of the Court of Appeals is hereby affirmed.
STEPHENS, C.J., and GANT and VANCE, JJ., concur.
LEIBSON, J., dissents in a separate dissenting opinion in which LAMBERT, J., joins.
WINTERSHEIMER, J., not sitting.

. Movant’s Third-Party Complaint contained other allegations that were addressed and dismissed by the trial court and are not part of this appeal.

. Recently repealed and replaced as KRS 271B.