Court Opinion

ID: 622909
Source: CourtListenerOpinion
Date Created: 2012-02-16 01:17:31+00
Date Added: 2024-06-11T17:51:02.762162
License: Public Domain

FILED
                                                            United States Court of Appeals
                                                                    Tenth Circuit

                                                                 February 15, 2012
                     UNITED STATES COURT OF APPEALS
                                                                Elisabeth A. Shumaker
                            FOR THE TENTH CIRCUIT                   Clerk of Court

    H. ROBERT WARREN; JOAN
    CROCKER,

                Plaintiffs-Appellants,
                                                          No. 09-2169
    v.                                        (D.C. No. 6:05-CV-00441-MV-RLP)
                                                           (D. N.M.)
    CAMPBELL FARMING
    CORPORATION; STEPHANIE
    GATELY; ROBERT GATELY,

                Defendants-Appellees.

                             ORDER AND JUDGMENT *

Before HARTZ, Circuit Judge, PORFILIO and BRORBY, Senior Circuit
Judges.

         This case involves a closely held Montana corporation with its principal

place of business in New Mexico. During the relevant time period, three

shareholders controlled all of the shares of Campbell Farming Corporation (“the

*
       After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and
collateral estoppel. It may be cited, however, for its persuasive value consistent
with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
company”). Defendant Stephanie Gately controlled 51% of the shares and

plaintiffs H. Robert Warren and Joan Crocker controlled the remaining 49% of the

shares. The company had three directors, Stephanie Gately, Warren, and the

company’s president, defendant Robert Gately, who is Stephanie Gately’s son.

The transaction that gave rise to this litigation involved a proposal by

Stephanie Gately, in her capacity as a corporate director, to award a bonus in the

form of company stock and cash (for a total value of $1.2 million) to her son,

Robert Gately, to compensate him for past service to the company and to prevent

him from resigning.

      After Stephanie Gately proposed the bonus, Warren requested that it be

voted on by all of the shareholders. Warren and Crocker both voted their shares

against the bonus. Stephanie Gately voted all of her shares in favor of the bonus.

Because she controlled a majority of the shares, the bonus was approved.

      Plaintiffs ultimately filed a derivative and direct action against the

company and the Gatelys in federal district court in New Mexico. They sought to

void the bonus transaction by asserting claims for breach of statutory and

fiduciary duties, as well as other common law claims. The district court held a

bench trial and then issued findings of fact and conclusions of law supporting a

decision in favor of defendants. Plaintiffs appealed from that decision.

      We have jurisdiction over this diversity case under 28 U.S.C. § 1291.

For the following reasons, we AFFIRM the district court’s judgment.

                                         -2-
                                          I.

      The district court determined that the bonus transaction was a director’s

conflict-of-interest transaction under Mont. Code Ann. § 35-1-461(2), but that the

transaction could be saved by the safe-harbor provision in § 35-1-462(2)(c)

because it was “fair to the corporation,” see id. The district court also concluded

that the Gatelys’ actions as directors satisfied the business judgment rule. The

district court further determined that the bonus transaction did not constitute a

breach of fiduciary duties. Finally, the district court held that equity would

support the affirmance of the bonus transaction.

      Plaintiffs argued on appeal that the district court erred by: applying the

safe-harbor provision to an executive bonus that lacked consideration; finding that

the bonus transaction was fair; applying the business-judgment rule to a director’s

conflict-of-interest transaction; applying a modified rule of judicial review to the

fiduciary-duty claim; and concluding that the bonus could be affirmed through the

application of equitable principles. Because the appeal presented several novel

and unsettled questions of state law, we certified the following three questions to

the Montana Supreme Court:

      (1) Can the safe harbor provision in Mont. Code Ann.
      § 35-1-462(2)(c) be extended to cover a conflict-of-interest
      transaction involving a bonus that lacks consideration and would be
      void under Montana common law?

      (2) Does the business judgment rule apply to situations involving a
      director’s conflict-of-interest transaction?

                                         -3-
      (3) Does the holding in Daniels v. Thomas, Dean & Hoskins, Inc.,
      804 P.2d 359, 365-67 (Mont. 1990), which appears to adopt an
      alternative test for evaluating whether there has been a breach of
      fiduciary duties by a controlling shareholder in a closely-held
      corporation, apply to a transaction that involves a conflict of
      interest?

Warren v. Campbell Farming Corp., 400 F. App’x 312, 312 (10th Cir. Oct. 7,

2010) (unpublished certification order).

      The Montana Supreme Court determined that (1) the bonus transaction can

be reviewed under the safe-harbor provision; (2) the business-judgment rule does

not apply to situations involving a director’s conflict-of-interest transaction; and

(3) the Daniels test applies to a breach-of-fiduciary claim against a controlling

shareholder involving a conflict-of-interest transaction. See Warren v. Campbell

Farming Corp., --- P.3d ---, 2011 WL 6888572, at *6-*8, *11 (Mont. Dec. 30,

2011). With the guidance provided by the Montana Supreme Court, we now

consider the issues raised on appeal.

                                           II.

      “In an appeal from a bench trial, we review the district court’s factual

findings for clear error and its legal conclusions de novo.” Roberts v. Printup,

595 F.3d 1181, 1186 (10th Cir. 2010) (quotation marks omitted). We review

“mixed questions of law and fact . . . under the clearly erroneous or de novo

standard, depending on whether the mixed question involves primarily a factual

inquiry or the consideration of legal principles.” Id. (quotation marks omitted).

                                           -4-
      A. Fairness of the Bonus Transaction

      Plaintiffs challenge the district court’s determination that the bonus

transaction is subject to review under the safe-harbor provision. In its answers to

the certified questions, however, the Montana Supreme Court explained that the

safe-harbor provision does apply to the bonus transaction at issue in this case.

Accordingly, the district court did not err in applying the safe-harbor provision to

the bonus transaction.

      As for the district court’s determination that the bonus transaction was fair

to the company, we review that determination for clear error because it is a mixed

question of law and fact that involves a primarily factual inquiry. See Printup,

595 F.3d at 1186. “A finding of fact is not clearly erroneous unless it is without

factual support in the record, or if the appellate court, after reviewing all the

evidence, is left with the definite and firm conviction that a mistake has been

made.” S. Colo. MRI, Ltd. v. Med-Alliance, Inc., 166 F.3d 1094, 1099 (10th Cir.

1999) (quotation marks omitted).

      The Montana Business Corporation Act (“Montana Act”) is patterned after

the American Bar Association’s Model Business Corporation Act (“Model Act”),

and therefore the Official Comments to the Model Act are instructive. Warren,

2011 WL 6888572, at *2. The relevant safe-harbor provision in the Montana Act

is identical to that contained in the Model Act. That provision states that “[a]

director’s conflicting interest transaction may not be enjoined, set aside, or give

                                          -5-
rise to an award of damages or other sanctions . . . if . . . the transaction, judged

according to the circumstances at the time of commitment, is established to have

been fair to the corporation.” Mont. Code Ann. § 35-1-462(2)(c) (2010); Model

Bus. Corp. Act § 8.61(b)(3) (2002).

      The Official Comments to the Model Act explain that:

      It has long been settled that a “fair” price is any price in that broad
      range which an unrelated party might have been willing to pay or
      willing to accept, as the case may be, . . . following a normal
      arm’s-length business negotiation, in the light of the knowledge that
      would have been reasonably acquired in the course of such
      negotiations, any result within that range being “fair.” The same
      statement applies not only to price but to any other key term of the
      deal.

Model Bus. Corp. Act, Official Comment to § 8-61(b), at 8-151. The Official

Comments further explain that:

      In considering the “fairness” of the transaction, the court will in
      addition be required to consider not only the market fairness of the
      terms of the deal, but also, as the board would have been required to
      do, whether the transaction was one that was reasonably likely to
      yield favorable results (or reduce detrimental results) from the
      perspective of furthering the corporation’s business activities.

Id. Finally, the Official Comments instruct that: “In some circumstances, the

behavior of the director having the conflicting interest can itself affect the finding

and content of ‘fairness.’” Id. at 8-152. “Unfair dealing” might involve a

director who fails to fully disclose his interest or a defect in the transaction or

who exerts improper pressure on the other directors. Id. “Thus, the course of

                                           -6-
dealing–or process–is a key component to a ‘fairness’ determination under

subsection (b)(3).” Id.

      Here, the district court conducted its fairness review consistent with the

guidance provided by the Official Comments. The district court made extensive

findings of fact, see Aplt. App., Vol. 1 at 2-23, and concluded that “[t]he

testimony and evidence at trial . . . establish that the bonus was fair to the

Company, both as to fair dealing and to fair value,” id. at 27. The court

summarized its findings, noting that the process for approving the bonus was not

“fraudulent or deceptive.” Id. at 28. The court further explained that

      the stock was valued at a fair amount, the bonus was cash neutral or
      nearly cash neutral to the Company, the overall amount of the bonus
      was reasonable and resulted in R. Gately’s salary being brought up to
      market level for the prior five years, there was minimal stock
      dilution for the minority shareholders, the bonus aligned R. Gately’s
      interests with the Company, and the bonus prevented R. Gately from
      resigning as President.

Id.

      The plaintiffs raise a number of different claims of error with respect to the

district court’s fairness determination, but the district court’s findings are

supported by the record, and we find no clear error in its conclusion that the

bonus transaction was fair to the company. 1

1
       Because we conclude that the bonus transaction was fair to the corporation,
we need not reach plaintiffs’ challenge to the district court’s alternative holding
that equitable principles would also support affirming the bonus transaction.

                                          -7-
      B. The Business Judgment Rule

      Next we consider the district court’s application of the business-judgment

rule. Under that rule, when a reasonable basis exists to indicate that the directors

of a corporation acted in good faith, the directors are immunized from liability for

honest mistakes or errors of judgment. See Ski Roundtop, Inc. ex rel. Ski

Yellowstone Inc. v. Hall, 658 P.2d 1071, 1078 (Mont. 1983). The district court

considered the Gatelys’ actions as directors under the business-judgment rule and

concluded that those actions would satisfy the rule. In answering the certified

questions, however, the Montana Supreme Court instructed that the

business-judgment rule should not be applied to a director’s conflict-of-interest

transaction.

      But the district court’s holding simply provided an alternative basis to

affirm the bonus transaction. The district court recognized that there was no

Montana law on point, but noted that it “need not try to determine how Montana

would rule on this question . . . because the facts satisfy both the more

liberal business judgment rule and the more exacting fairness standards.”

Aplt. App., Vol. 1 at 29 n.3. Because we affirm the district court’s conclusion

that the bonus was fair to the corporation, any error in the district court’s

application of the business-judgment rule is harmless.

                                          -8-
      C. Fiduciary-Duty Claim

      Plaintiffs also challenge the district court’s application of the Daniels test

to their breach-of-fiduciary-duty claim. The district court concluded that in

Daniels Montana had created a modified rule for judicial review of alleged

breaches of fiduciary duty by the controlling group in closely held corporations.

Under the modified rule, if the controlling group in a closely held corporation can

demonstrate a legitimate business purpose for its actions, and the minority

stockholder cannot demonstrate a less harmful alternative, then the disputed

transaction should be upheld. Daniels, 804 P.2d at 366. Applying this standard,

the district court concluded that defendants had “shown that the stock

compensation bonus to R. Gately served a specific and legitimate business

purpose.” Aplt. App., Vol. 1 at 31. The court further concluded that “[t]he

minority stockholders did not demonstrate a less harmful alternative that would

achieve the same business purposes–i.e., keeping R. Gately from resigning. In

fact, the minority stockholders did not propose any alternatives.” Id. The district

court therefore determined that the bonus transaction did not constitute a breach

of fiduciary duties.

      Plaintiffs dispute the district court’s application of the modified rule from

the Daniels case. In answer to our certified questions, however, the Montana

Supreme Court approved the application of the Daniels test to a fiduciary-duty

claim challenging the actions of the majority shareholder. Plaintiffs also assert

                                         -9-
that the district court erred in finding that they had not proposed less harmful

alternatives. Because the record supports the district court’s finding, there was no

error.

                                         III.

         We AFFIRM the judgment of the district court.

                                                     Entered for the Court

                                                     Wade Brorby
                                                     Senior Circuit Judge

                                         -10-