Court Opinion

ID: 1081482
Source: CourtListenerOpinion
Date Created: 2013-10-09 20:49:41.358799+00
Date Added: 2024-06-11T12:49:51.184730
License: Public Domain

LOUIS A. McREDMOND,                  )
PATRICK J. McREDMOND, JR., and       )
MONICA McREDMOND TERRY,              )
on behalf of ELK BRAND               )
MANUFACTURING COMPANY,               )
                                     )
       Plaintiffs/Appellants,        )
                                     )    Davidson Chancery
                                     )    No. 93-2368-I
VS.                                  )
                                     )    Appeal No.
                                     )    01-A-01-9412-CH-00594
ANDREW MARIANELLI,                   )
WALTER MARIANELLI,                   )
DAVID MANNING, EDWIN S. PYLE,        )
GORDON FERRAGINA, MILANO             )
CORPORATION, AND ELK BRAND           )
MANUFACTURING COMPANY,               )
                                     )    REVERSED AND REMANDED
       Defendants/Appellees.         )

                     IN THE COURT OF APPEALS OF TENNESSEE
                          MIDDLE SECTION AT NASHVILLE

         APPEAL FROM THE CHANCERY COURT OF DAVIDSON COUNTY
                       AT NASHVILLE, TENNESSEE

               HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR

Kenneth R. Jones
SHERRARD AND ROE
Third National Financial Center
424 Church Street, Suite 2000                            FILED
Nashville, Tennessee 37219
                                                         December 6, 1996
CYRUS L. BOOKER
315 Deaderick Street, Suite 1280                        Cecil W. Crowson
Nashville, Tennessee 37228-1280                        Appellate Court Clerk

John P. Branham
BRANHAM & DAY
1910 First Union Tower
150 Fourth Avenue, North
Nashville, Tennessee 37219
ATTORNEYS FOR PLAINTIFFS/APPELLANTS

Jon D. Ross
Philip N. Elbert
John A. Coates
NEAL & HARWELL
2000 First Union Tower
150 Fourth Avenue, North
Nashville, Tennessee 37219
ATTORNEYS FOR DEFENDANT/APPELLEE
ELK BRAND MANUFACTURING COMPANY

                                     PER CURIAM
LOUIS A. McREDMOND,                             )
PATRICK J. McREDMOND, JR., and                  )
MONICA McREDMOND TERRY,                         )
on behalf of ELK BRAND                          )
MANUFACTURING COMPANY,                          )
       Plaintiffs/Appellants,                   )
                                                )       Davidson Chancery
                                                )       No. 93-2368-I
VS.                                             )
                                                )       Appeal No.
                                                )       01-A-01-9412-CH-00594
ANDREW MARIANELLI,                              )
WALTER MARIANELLI,                              )
DAVID MANNING, EDWIN S. PYLE,                   )
GORDON FERRAGINA, MILANO                        )
CORPORATION, AND ELK BRAND                      )
MANUFACTURING COMPANY,                          )
     Defendants/Appellees.                      )

                                         O P I N I O N

        The captioned plaintiffs have appealed from a summary judgment dismissing their

suit against the captioned defendants.

        The nature of the suit and proceedings are as follows:

        The complaint, as amended, alleges that plaintiffs are minority stockholders of Elk

Brand Manufacturing Company, hereafter Elk; that the defendants, Marianelli, Manning and

Ferragina, are shareholders, officers and directors of Elk; that the defendant Pyle is a director

and legal counsel of Elk; and that said defendants wrongfully approved and executed an

improvident contract with Milano Corporation whereby Milano and said defendants were

unjustly enriched and Elk was wrongfully impoverished, thereby enriching the defendants

and depriving plaintiffs of their rightful share in the real profits of Elk.

        The complaint further charged that defendants breached their fiduciary duties by self-

dealing in granting a profitable contract to a corporation owned by them and in concealing

their self dealing from plaintiffs.

                                                -2-
       The complaint prayed:

       1.     For a judgment in favor of Elk for damages.

       2.     For cancellation of the contract and injunction against further payments

thereunder.

       3.     For refund of money paid by Elk under the contract.

       4. For a complete accounting.

       5.     Equitable remedies.

       6.     Punitive damages to Elk.

       7.     Attorneys’ Fees.

       8.     Discretionary costs.

       9.     General relief.

       10. A jury trial.

       Elk intervened as a defendant and moved to dismiss because:

       1. Independent legal counsel has advised the corporation that the suit is not in the

best interest of the corporation.

       2. Plaintiffs are not qualified under applicable Kentucky statutes to represent the

stockholders of the corporation.

       3. The plaintiffs waited three years without complaining about the contract.

       4. Ulterior motive of Louis McRedmond to force the defendants to buy his stock.

       No answer has been filed by any defendant.

       By agreed order, the Trial Court scheduled an evidentiary hearing upon the motion to

dismiss. At the conclusion of the hearing, the Trial Judge granted leave to the parties to file

proposed findings of fact and conclusions of law, which was done.

                                               -3-
       The judgment of the Trial Court reads as follows:

                This action is before the Court on the defendant Elk Brand’s
              motion to dismiss the shareholder derivative lawsuit that has
              been filed by the plaintiffs. Both parties in this action were
              directed to submit findings of fact and conclusions of law to
              this Court. Because the Court was forced to consider evidence
              outside the pleadings, the Court will treat Elk Brand’s motion
              as a motion for summary judgment. Upon consideration of all
              the evidence presented in this matter, the Court adopts the
              findings of fact and conclusions of law submitted by Elk
              Brand. Therefore, the Court GRANTS Elk Brand’s motion,
              and dismisses the plaintiffs’ complaint. Costs are taxed to the
              plaintiffs.

              It is so ordered.

       The “Findings of Fact and Conclusions of Law Proposed by Defendant, Elk Brand

Manufacturing Company” consists of sixty-one pages. It contains the following significant

provisions:

               Plaintiffs in this shareholder derivative action challenge Elk
              Brand’s entry into the MSA with Milano. Plaintiffs made
              demand upon the Board of Directors of Elk Brand on April 15,
              1993, that Elk Brand terminate the MSA with Milano and seek
              recovery of all sums paid to Milano pursuant to the terms of the
              MSA.

               Defendant Elk Brand’s motion to dismiss this derivative
              action arises out of the refusal of plaintiffs’ demand by the
              Board of Directors of Elk Brand. Defendant Elk Brand seeks
              dismissal of this action on two grounds. First, defendant Elk
              Brand avers that this Court should uphold the business
              judgment of Elk Brand’s Board of Directors in rejecting the
              demands of plaintiffs and in determining that this action should
              be dismissed as not in the best interests of Elk Brand. Second,
              defendant Elk Brand avers that the derivative plaintiffs fail to
              meet the requirement of Rule 23.06 of the Tennessee Rules of
              Civil Procedure and Ky.Rev. State. §271B.7-400 that they
              fairly and adequately represent the interests of the shareholders
              and that the action be brought primarily for the benefit of the
              corporation.

               The Court conducted a three-day evidentiary hearing on April
              4, 5 and 6, 1994, in connection with defendant Elk Brand’s
              motion to dismiss. The Court has heard and has considered the
              testimony introduced at the evidentiary hearing. The Court has
              reviewed the depositions introduced into evidence and the
              exhibits introduced at the evidentiary hearing. The Court has
              considered the briefs submitted by the parties and the entire
              record in this cause and has concluded that defendant Elk
              Brand’s motion to dismiss this shareholder derivative action
              should be granted.

                                             -4-
....

 Under the business judgment rule, courts presume that a
corporation’s directors, when making a business decision, acted
on an informed basis, in good faith, and with the honest belief
that their decision was in the corporation’s best interests. See
Lewis v. Boyd, 838 S.W.2d at 220, 221; Spiegel v. Buntrock,
571 A.2d at 774. The burden is on the party challenging the
board’s decision to establish facts rebutting the presumption.
See Aronson v. Lewis, 473 A.2d at 812. The Court concludes
that plaintiffs’ proof in this regard was woefully inadequate and
failed to rebut the presumption accorded by the business
judgment rule that the directors acted on an informed basis, in
good faith and in the honest belief that rejection of plaintiffs’
demands and dismissal of this action was in the best interests
of the corporation.

....

 . . . Since the plaintiff shareholders’ demands in this case were
made and were refused by the board, the “focus of the judicial
inquiry is whether the board’s response was wrongful.” As
noted above, the tacit admission rule has been adopted in
Tennessee in Lewis v. Boyd, 838 S.W.2d at 222. It is no longer
necessary for the Court to consider questions of director
disinterestedness and independence, which are the focus of
judicial inquiry in a demand excused case. See Levine v. Smith,
591 A.2d at 212.

....

 The Elk Brand Board took formal action to oppose a
continuation of this action and to seek its dismissal at a
meeting of the Elk Brand Board on September 18, 1993, which
all seven Directors attended. The resolution in question was
approved by the votes of five directors: David Manning, Walter
Marianelli, Andrew Marianelli, Edwin S. Pyle, and R. Curtis
Brasher. Plaintiff Louis A. McRedmond and his brother,
Patrick McRedmond, Sr., abstained. At least three of the
members of the Board, then present and voting in favor of the
resolution, were independent and disinterested, that is, Andrew
Marianelli, Edwin S. Pyle, and R. Curtis Brasher. This vote
satisfied the requirements of Kentucky’s safe-harbor statute for
director approval of conflict-of-interest transactions. See Ky.,
Rev. Stat. § 271B.8-310(3). . . .

....

 The evidence before the Court does not demonstrate that the
vote of the disinterested directors to terminate this litigation
was unreasonable, but rather the Court concludes that their
decision was, in fact, in the best interests of the corporation.
Moreover, there is no evidence to support a conclusion that the
directors’ decision was primarily motivated by personal
interest. The Court concludes that plaintiffs have wholly failed
to rebut the business judgment rule’s presumption of good faith

                               -5-
with respect to the decision of the directors to seek termination
of this litigation as inimical to Elk Brand’s best interests.

....

 Based upon the foregoing analysis, the Court concludes that
the plaintiffs have failed to rebut the business judgment rule’s
presumption that the Elk Brand directors acted on an informed
basis and in a reasonable manner in voting to reject plaintiffs’
demands and to seek dismissal of this derivative litigation. . . .

....

 Plaintiffs’ brazen attempt to use this derivative action as
leverage to force Elk Brand to repurchase their shares and those
of the other members of the McRedmond family is a classic
abuse of the derivative suit remedy. . . .

....

 The plaintiffs’ demand letter and the proof introduced at the
evidentiary hearing make clear that the primary objective of the
derivative plaintiffs is not the enforcement of the corporation’s
claims, but rather is to further their own individual interests by
coercing, with the threat of this expensive litigation, Elk
Brand’s repurchase of their shares and those of the other
members of the McRedmond family.

....

 . . . The “equitable” remedy sought by plaintiffs in the fifth
prayer for relief in the complaint reveals clearly that this
lawsuit was brought for the personal benefit of plaintiffs and
not for the benefit of Elk Brand. . . .

....

 . . . Plaintiffs’ fifth prayer for relief asks this Court to structure
an “equitable” remedy that reorganizes the ownership of Elk
Brand stock. Milano currently owns 60% or 12,505 shares of
the total of 20,841 shares of Elk Brand stock which are now
issued and outstanding. Plaintiffs request that this Court divest
Milano of all ownership in its shares, even though the shares
are pledged to secure a substantial loan from Third National
Bank, who is also the primary lender of working capital to Elk
Brand. The Court is asked to treat Milano’s 1989 purchase of
the shares as a redemption by Elk Brand.

 The “equitable” remedy sought by plaintiffs would result in an
increase in the percentages of ownership of the McRedmond
family in Elk Brand from 18.4% to 46% at no cost to the
McRedmonds. Plaintiffs’ requested “equitable” remedy is
plainly designed to confer unfair benefits upon the plaintiffs
personally. . . .

....

                                 -6-
. . . Plaintiffs’ economic interests are antagonistic to all
members of the class they claim to represent whose shares have
been voted to approve the MSA and to ratify the previous
actions of the Elk Brand Board of Directors. . . .

....

 The Court has also considered the plaintiffs’ unfamiliarity
with this litigation and the degree of control exercised by the
attorneys over the litigation. See Rothenberg v. Security
Management Company, Inc., 667 F.2d at 961. None of the
derivative plaintiffs whose testimony was presented to the
Court by deposition had any significant knowledge concerning
the factual basis underlying the allegations in the complaint.
Each relied upon the advice of his or her attorney and signed
the complaint with virtually no knowledge concerning the facts
in this case.

....

 After plaintiff Louis A. McRedmond had been on the Elk
Brand Board of Directors for a year, he attended the 1993
annual meeting of shareholders of Elk Brand on January 16,
1993, and voted his 1,616 shares and the proxies of an
additional 1,384 shares owned by McRedmond family
members, including proxies for the derivative plaintiffs,
Monica McRedmond Terry and Patrick J. McRedmond, Jr., to
ratify and approve the acts and conduct of the Board of
December 5, 2001 directors through the date of the meeting.
Thus, in 1993, Louis A. McRedmond voted a total of 3,000
shares at Elk Brand’s 1993 annual shareholders meeting in
favor of ratification and approval of the previous acts and
conduct of the Elk Brand Board of Directors.

 The MSA was approved by the Elk Brand Board of Directors
in 1989 without a dissenting vote. For over four years Elk
Brand and its shareholders have had both the burdens and the
benefits of the MSA. The challenged transaction has resulted
in a substantial increase in Elk Brand’s sales and record profits
in fiscal year 1993. Sales and profits for fiscal year 1994 are
ahead of the record levels for 1993.

 Even assuming that the MSA transaction was somehow
unauthorized in 1989, in the face of all the overwhelming
evidence to the contrary, the MSA would still be valid under
the Kentucky law of estoppel and ratification by acquiescence. .
..

....

 . . . 23. The Court finds that it is disingenuous of the plaintiffs
to argue based upon a mechanistic review of the
unconsolidated financial statements of Elk Brand and Milano
Corporation that the MSA has had the net affect of decreasing
profits at the Elk Brand level. Such analysis ignores the
dynamics of the business relationship between Elk Brand and

                                -7-
               Milano and the benefits realized by cementing the relationship
               between Elk Brand and its core management group through
               Milano’s stock ownership. When the traditional business of
               Elk Brand continued to dissipate as the Board had anticipated,
               Milano Corporation developed new markets. The losses Elk
               Brand experienced were not caused by payments of
               commissions to Milano. The Court finds that the losses were
               caused by production inefficiencies and escalating costs. These
               production difficulties were addressed and corrected by the
               managers who had linked their future to the prosperity of Elk
               Brand through Milano’s stock purchase.

                ....

                25. Plaintiffs present a misleading and flawed analysis when
               they attempt to contract Milano’s financial condition to that of
               Elk Brand based upon a simplistic comparison of financial
               statements. . . .

               ....

                27. Further, the Court has carefully reviewed the allegations
               of the complaint, and it does not contain specific or
               particularized facts alleging that members of the Elk Brand
               Board were not disinterested and not independent or that they
               were unwilling or incapable of properly considering such a
               demand by minority shareholders.

               ....

                50. Having critically reviewed them, the Court finds that Mr.
               Harrison’s findings and recommendations to the Elk Brand
               Board were made in good faith, are fully supported by the
               record of his investigation and are totally consistent with the
               best interests of Elk Brand as articulated in his report. . . .

               ....

                 98. The Court, having reviewed the verified complaint and
               other pleadings, having carefully considered the testimony of
               the witnesses, both live and by deposition, and having reviewed
               all of the exhibits that have been introduced, is convinced, and
               specifically finds as a matter of fact, that the continuation of
               this litigation would not be in the best interests of Elk Brand.
               Mr. Brasher, among others, testified compellingly about his
               concerns in this regard. Indeed, based upon all of the proof, it
               is the finding of this Court that to allow this litigation to
               proceed would be detrimental to the interests of Elk Brand.

       The foregoing excerpts from the record illustrate the confusing picture presented to

this Court. What began as a “motion to dismiss” on narrow grounds mushroomed into a

judgment upon the merits of plaintiffs’ suit without the jury trial requested in the complaint.

                                              -8-
While the Trial Court designated its judgment as summary in nature, neither the finding of

fact nor the judgment refers to uncontradicted evidence.

       A motion to dismiss is akin to a demurer under former practice in that it admits all

matters properly pleaded and, therefore is a test of the leading pleading. Sanders v. Vinson,

558 S.W.2d 838 (Tenn. 1977).

       TRCP Rule 12.02 provides that, where evidence is considered, the motion may be

considered as one for summary judgment. If this occurs the rules for summary judgment

apply. The pole stars of summary judgments are no genuine issue of material fact and

entitlement to judgment as a conclusive matter of law. Daniels v. White Consol. Indus., Inc.,

Tenn. App. 1985, 692 S.W.2d 422. Mansfield v. Colonial Freight Systems, Tenn. App. 1993,

862 S.W.2d 527. It is also fundamental that the movant has the burden of producing or

pointing out the uncontradicted evidence which entitles him to judgment as a matter of law.

Byrd v. Hall, Tenn. 1993, 847 S.W.2d 208. Until the movant satisfies this initial burden, the

opponent of the motion has no duty to produce or point out any evidence.

        As stated above, the only defensive pleading before the Trial Court was the motion to

dismiss of the intervenor-defendant, Elk, which presented only two grounds for dismissal: (1)

reasonableness of the action of the board of directors in refusing to authorize this suit, and (2)

lack of standing of plaintiffs.

                             REASONABLENESS OF REFUSAL

       If a majority of directors has wrongfully voted to siphon profits of the corporation to

another corporation in which they own an interest, thereby depriving a minority of

stockholders their share of the profits to which they are entitled, such a majority of directors

cannot defeat the suit of the minority by disapproving the suit brought by the minority on

                                               -9-
behalf of the corporation. If this were true, minority stockholders would have no recourse

against such machinations of the majority.

       The first ground of the motion to dismiss is without merit.

                                STANDING OF PLAINTIFFS

       Neither the Kentucky statute nor the Tennessee rule requires a minority group of

stockholders to have interests identical with those of the majority whose actions are

challenged. The applicable portion of the Kentucky Statute states:

               The derivative proceeding shall not be maintained if it appears
               that the person commencing the proceeding does not fairly
               represent the interests of the shareholders in enforcing the right
               of the corporation.

       It is clear that all shareholders of Elk will share in the benefits of a successful

prosecution of this suit. Some of them may suffer personal loss, or loss of dividends from

their separately owned corporation, but this does not prevent plaintiffs’ suit which is for the

benefit of all stockholders of Elk.

       TRCP Rule 23.6 reads in pertinent part as follows:

               The derivative action shall not be maintained if it appears that
               the plaintiff does not fairly and adequately represent the
               shareholders or members similarly situated in enforcing the
               right of the corporation or association.

       It is clear that the plaintiffs fairly and adequately represent the stockholders similarly

situated without prejudicing the remainder of the stockholders who appear to have recouped

their lost dividends from Elk by the profits derived by their other corporation.

       All other subjects of the sixty-one page “Finding of Fact and Conclusions of Law” are

superfluous to the matter at hand, the disposition of the motion to dismiss filed by Elk.

                                              -10-
       The judgment of the Trial Court is reversed. Costs of this appeal are taxed against the

defendants. The cause is remanded for further proceedings.

       Reversed and Remanded.

                                                    PER CURIAM

                                            -11-