Court Opinion

ID: 4251015
Source: CourtListenerOpinion
Date Created: 2018-03-01 20:13:15.645674+00
Date Added: 2024-06-11T13:54:00.216100
License: Public Domain

IN THE SUPREME COURT OF MISSISSIPPI

                       NO. 2016-CA-00288-SCT

THE MATTER OF THE ESTATE OF FRANKIE
DON WARE, DECEASED: CAROLYN WARE,
EXECUTRIX

v.

RICHARD WARE

DATE OF JUDGMENT:              12/28/2015
TRIAL JUDGE:                   HON. KENNETH M. BURNS
TRIAL COURT ATTORNEYS:         THOMAS A. WICKER
                               CASEY LANGSTON LOTT
                               REX F. SANDERSON
                               DUSTIN COLT CHILDERS
COURT FROM WHICH APPEALED:     CHICKASAW COUNTY CHANCERY
                               COURT
ATTORNEYS FOR APPELLANT:       RHETT R. RUSSELL
                               THOMAS A. WICKER
ATTORNEYS FOR APPELLEE:        CASEY LANGSTON LOTT
                               DUSTIN COLT CHILDERS
NATURE OF THE CASE:            CIVIL - OTHER
DISPOSITION:                   REVERSED AND REMANDED - 03/01/2018
MOTION FOR REHEARING FILED:
MANDATE ISSUED:

                      CONSOLIDATED WITH

                       NO. 2016-CA-01589-SCT

IN THE MATTER OF THE ESTATE OF FRANKIE
DON WARE, DECEASED: CAROLYN WARE, AS
EXECUTRIX OF THE ESTATE OF FRANKIE
DON WARE

v.
RICHARD WARE

DATE OF JUDGMENT:                            10/11/2016
TRIAL JUDGE:                                 HON. KENNETH M. BURNS
COURT FROM WHICH APPEALED:                   CHICKASAW COUNTY CHANCERY
                                             COURT
ATTORNEYS FOR APPELLANT:                     RHETT R. RUSSELL
                                             THOMAS A. WICKER
ATTORNEYS FOR APPELLEE:                      CASEY LANGSTON LOTT
                                             DUSTIN COLT CHILDERS
NATURE OF THE CASE:                          CIVIL - OTHER
DISPOSITION:                                 REVERSED AND REMANDED - 03/01/2018
MOTION FOR REHEARING FILED:
MANDATE ISSUED:

       BEFORE RANDOLPH, P.J., KING AND BEAM, JJ.

       RANDOLPH, PRESIDING JUSTICE, FOR THE COURT:

¶1.    This case involves a dispute between a mother and son, Carolyn Ware (“Carolyn”) and

Richard Ware (“Richard”), regarding the distribution of shares of stock of three closely held

corporations. The shares were being held by the estate of the deceased husband/father,

Frankie Don Ware (“Frankie”). Frankie’s will directed that the shares be distributed to a

testamentary trust. The bylaws of the corporations (in which Frankie, Carolyn, and Richard

were the sole shareholders) required any outstanding shares of stock be offered to the

corporations prior to any transfer. Carolyn, the executrix, filed a petition to close Frankie’s

estate and to distribute Frankie’s assets (including the shares) to the trust. Richard filed an

objection to the closing of the estate, asserting the corporate bylaws of the three corporations.

Carolyn responded, arguing that Richard lacked standing to object. The chancellor found for

Richard and required Carolyn to offer the shares back to each corporation prior to

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transferring the shares to the trust. Carolyn subsequently appealed. The Court finds that

Richard lacked standing to object to the closing of Frankie’s estate.

                        FACTS AND PROCEDURAL HISTORY

¶2.    On April 8, 2011, Frankie passed away, leaving a last will and testament. Frankie

appointed his wife, Carolyn, to serve as executrix of his will. The will created “The Frankie

Ware Family Trust,” which was to receive all of Frankie’s estate’s assets available for

distribution. Carolyn, Richard, and his two sisters, Angela and Dana, were named trustees

of the Frankie Ware Family Trust. The primary purpose of the trust was to provide the

income and principal to Carolyn during her lifetime. His will provided that upon Carolyn’s

death, Richard and his sisters were to receive only income benefits from the trust, and that

his grandchildren were to receive the income and/or principal for their medical and

educational needs.

¶3.    Included in the assets available for distribution to the family trust were outstanding

shares of stock equal to 25% of three closely held corporations: Ware Milling, Inc.;

Chickasaw Farm Services, Inc.; and Chickasaw Grain Transportation, Inc. Carolyn also

owned 25% of the shares of each corporation in her own name. Richard owned the

remaining 50% of the shares in each of the corporations.

¶4.    Three years after Frankie’s will was admitted to probate, Carolyn, as executrix, filed

a Petition to close the estate and to distribute the assets according to Frankie’s will. Richard

filed an objection to the closing of the estate, asserting a section of each corporation’s bylaws

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that required shares to be offered back to the corporations prior to any transfer. Each of the

corporation’s bylaws contained the following provision:

       No shareholder shall have the right to sell, assign, pledge, encumber, transfer,
       or otherwise dispose of any of any [sic] of the shares of the corporation
       without first offering the shares for sale to the corporation at the annually
       established net asset value of such shares. Such offer shall be in writing,
       signed by the shareholder. The written offer shall be sent by registered or
       certified mail to the corporation at its principal executive office, and shall
       remain open for acceptance by the corporation for a period of 120 days from
       the date of mailing.

Richard argued that because Carolyn, as executrix, had not yet offered the shares to the

corporations, the estate, as holder of the shares, could not be closed until the corporate

restrictions were satisfied. Carolyn responded that Richard lacked standing as an individual

to object on behalf of the corporations. Furthermore, Carolyn argued that the objection was

an unreasonable restraint on the disposition of Frankie’s will, and the restriction in the

bylaws did not apply to testamentary dispositions.

¶5.    A hearing on Richard’s objection was held on November 24, 2014. Richard and

Carolyn testified about the share restriction of the corporations and its purpose, as well as

Frankie’s purpose in constructing his will. Richard testified that the intent of the share

restriction was to limit stock ownership to the three original shareholders—Frankie, Carolyn,

and Richard. Richard also offered an attorney, Albert Delgadillo, as an expert witness who

opined that the word “transfer” in the share restriction applied to testamentary dispositions.

Carolyn testified that her and her husband’s intent with regard to the corporations was to

ensure that the entire family benefitted from the businesses, and not just the original three

                                              4
shareholders. Carolyn also requested that if the trial court required the shares be offered back

to the corporations, that the court also order an appraisal and audit of each corporation.

¶6.    The trial court subsequently entered an order appointing The Koerber Company

(“Koerber”) to conduct a forensic audit and valuation of each corporation. Koerber

conducted an extensive study of each corporation, and determined the net asset value of a

25% equity interest, established as of April 8, 2011 (the date of Frankie’s death), totaled

$2,109,0001 after discount. Koerber applied a 20% discount for “lack of control,” and a 20%

discount for “lack of marketability,” to decrease the value of a 25% equity interest in each

corporation.

¶7.    Carolyn disagreed with Koerber’s valuation, arguing that the value of a 25% equity

interest in the corporations was worth more than fifteen million dollars. Richard also

disagreed with Koerber’s valuation, arguing that it was too high, as the value of Ware

Milling’s accounts receivable, inventory, and cash on hand essentially were calculated twice

in Koerber’s valuation.

¶8.    The trial court concluded that Carolyn was required to offer the stocks to the

corporations for purchase, citing Mississippi Code Section 79-4-6.27(b) (Rev. 2013), which

provides that “[a] restriction on the transfer or registration of transfer of shares is valid and

enforceable against the holder or a transferee of the holder . . . ,” though the trial court did

       1
       Koerber valued a 25% equity interest in Ware Milling, Inc., at $1,880,000,
Chickasaw Farm Services, Inc., at $161,000, and Chickasaw Grain Transportation, Inc., at
$68,000.

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not address section (c) of the statute, which provides when restrictions are authorized.2 The

trial court then held that Carolyn was required to offer the shares to the corporation under

West v. West, 88 So. 3d 735, 738 (Miss. 2012), in which this Court held “that statutory

restrictions [under Section 79-4-6.27] on the transfer of restricted shares of corporate stock

apply to both voluntary and involuntary transfers of the shares . . . .”

¶9.    The trial court accepted Koerber’s valuation of the three corporations, including the

discounts. Finally, the trial court found that the corporations should pay the estate a

reasonable rate of interest (three percent) from the date the estate was opened until the

corporations exercised their option to purchase the stock. The corporations never were made

parties to this proceeding.

¶10.   Carolyn soon thereafter filed a motion to alter or amend the judgment of the trial

court, arguing that the trial court lacked jurisdiction to establish the value of the corporations.

The trial court denied Carolyn’s motion. Carolyn timely appealed to this Court.

¶11.   Notwithstanding the appeal to this Court, this dispute continued at the lower court.

One month after Carolyn’s appeal, Richard filed a motion for declaratory judgment in the

trial court, requesting the court to declare “the rights, status and legal relations” between

       2
          Mississippi Code Section 79-4-6.27(b) reads, in its entirety, as follows: “A
restriction on the transfer or registration of transfer of shares is valid and enforceable against
the holder or a transferee of the holder if the restriction is authorized by this section and its
existence is noted conspicuously on the front or back of the certificate or is contained in the
information statement required by § 79-4-6.26(b). Unless so noted, a restriction is not
enforceable against a person without knowledge of the restriction.” Section (c) continues:
“A restriction on the transfer or registration of transfer of shares is authorized: (1) To
maintain the corporation’s status when it is dependent on the number or identity of its
shareholders; (2) To preserve exemptions under federal or state securities law; (3) For any
other reasonable purpose.”

                                                6
Richard, Carolyn, and the three corporations at issue, though the corporations were not made

parties to these additional proceedings. Richard informed the court that Carolyn had yet to

offer the shares back to the corporations, and that Carolyn intended to block any stock

repurchase by the corporations by combining her own 25% interest with the estate’s 25%

interest, creating a deadlock. Richard argued that the right to repurchase the stock belonged

to the corporations— not the shareholders. Therefore, Richard requested that the trial court

enter an order declaring that the board of directors of the corporations had the voting power

to decide whether to purchase the stock. In the alternative, Richard asked the trial court to

prevent Carolyn from voting because it would be “inherently unfair to allow a shareholder

with an obvious conflict of interest to vote . . . .”

¶12.   Three months after Carolyn’s initial appeal, Richard filed an additional motion

relating that Carolyn still had not offered the stock to the corporations. Richard filed a

“Motion to Direct Specific Act of a Disobedient Party, or in the alternative, to Set

Supersedeas Bond.” Richard requested the trial court to compel Carolyn to offer the stock

for purchase by the corporations. In the alternative, Richard requested the trial court to set

a supersedeas bond against Carolyn in the amount of 125% of the value of the shares.

¶13.   The trial court issued an order addressing both Richard’s motion for declaratory

judgment, and his motion to compel action by a disobedient party. The trial court held that

the board of directors, and not the shareholders, had authority to vote on whether to

repurchase the stocks. In support, the trial court cited Harper v. Harper, 491 So. 2d 189, 195

(Miss. 1986), which provides that “[t]he management of a corporation is vested in its board

                                                7
of directors and not the stockholders.” Further, the trial court cited Mississippi Code Section

79-4-8.01 (Rev. 2013), which provides that “[a]ll corporate powers shall be exercised by or

under the authority of the board of directors of the corporation . . . .”

¶14.   In addressing Richard’s motion to compel action by a disobedient party, the trial court

cited Mississippi Code Section 11-51-43 (Rev. 2015), which provides:

       In any case of an appeal to the Supreme Court, where no special provision is
       made by law for a supersedeas of the judgment or decree appealed from, or for
       the bond to be given in such case, a supersedeas may be allowed by the court
       rendering the judgment or decree appealed from . . . with such sureties as said
       court or judge may direct in the order for a supersedeas.

Accordingly, the trial court held that Carolyn should be required to post a supersedeas bond

in the amount of $250,000, which the trial court held was sufficient to protect Richard’s

interests. Carolyn posted the bond in the set amount and subsequently appealed the trial

court’s second ruling.

                                           ISSUES

¶15.   Carolyn raises seven issues on appeal:

       (1) Whether Richard had standing to object to the closing of the estate on
       behalf of the corporations.

       (2) Whether the stock-transfer restriction applies to testamentary dispositions.

       (3) Whether Richard’s objection to the closing of the estate was timely.

       (4) Whether the chancery court erred by appointing the Koerber Company’s
       business valuations.

       (5) Whether the chancery court erred by accepting the Koerber Company’s
       twenty percent discount on the value of the stocks for “lack of control and
       marketability.”

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       (6) Whether the chancery court erred in awarding the estate three percent
       interest on the value of the shares.

       (7) Whether the chancery court erred by holding that the Board of Directors,
       and not the shareholders, may vote to purchase the stock.

Carolyn’s first argument regarding Richard’s standing is case-dispositive.

                                        ANALYSIS

       I.     Standing

¶16.   Carolyn argues that Richard’s objection to the closing of the estate is a shareholder

derivative action, and therefore Richard lacked standing to object. Despite Carolyn’s raising

this issue throughout the proceedings, the trial court declined to address Richard’s standing.

¶17.   “Standing is a jurisdictional issue.” Hotboxxx, LLC v. City of Gulfport, 154 So. 3d

21, 27 (Miss. 2015) (citations omitted). Therefore, “it may be raised by the Court sua sponte

or by any party at any time, and the standard of review is de novo.” Id.

¶18.   Carolyn cites Bruno v. Southeastern Services, Inc., 385 So. 2d 620, 622 (Miss.

1980), in which this Court adopted the rule

       that an action to redress injuries to a corporation, whether arising in contract
       or in tort cannot be maintained by a stockholder in his own name, but must be
       brought by the corporation because the action belongs to the corporation and
       not the individual stockholders whose rights are merely derivative. The rule
       applies even though the complaining stockholder owns all or substantially all
       of the stock of the corporation.

¶19.   Richard argues that his claim is not a shareholder derivative claim, but rather, an

objection to the administration of the estate. Richard argues that because he is named a

trustee of the trust created by Frankie’s will, he has standing to object to the closing of

Frankie’s estate. Thus, Richard argues that Carolyn’s standing argument, as it applies to

                                              9
shareholder derivative actions, is inapplicable. Notably, Richard cites no authority for his

position that his title of trustee confers upon him standing to object to the administration of

an estate. Regardless, his argument is without merit. Richard is attempting to prevent assets

from being distributed to the trust. “A trustee shall take reasonable steps to enforce claims

of the trust and to defend claims against the trust.” Miss. Code Ann. § 91-8-811(a) (Rev.

2013) (emphasis added). Richard’s title of trustee alone is insufficient to confer standing

unless he is enforcing claims on behalf of the Frankie Ware Family Trust or is defending

claims against the family trust. Id.

¶20.   In order to address standing, the Court must determine whether Richard “had the right

to participate in this cause of action.” City of Picayune v. Southern Reg’l Corp., 916 So.

2d 510, 519-520 (Miss. 2005). “Fundamental to this review” is what body of law applies to

the dispute. Id. Accordingly, whether Richard’s action is indeed a shareholder derivative

action will determine what law applies, and in turn, determine Richard’s standing.

¶21.   “[I]n determining whether the action belongs to the corporation or the individual, the

focus of the inquiry is whether the corporation or the individual suffered injury.” Scafidi v.

Hille, 180 So. 3d 634, 647 (Miss. 2015) (quoting Mathis v. ERA Franchise Sys., Inc., 25

So. 3d 298, 303 (Miss. 2009)). “The action is derivative if the gravamen of the complaint

is injury to the corporation, or to the whole body of its stock or property without any

severance or distribution among individual shareholders, or if it seeks to recover assets for

the corporation or to prevent the dissipation of its assets.” Id. Richard’s objection to the

closing of Frankie’s estate is, in reality, a shareholder derivative claim. Richard was seeking

                                              10
solely to enforce a putative corporate right. As such, the law applying to shareholder

derivative actions must apply. See City of Picayune, 916 So. 2d at 519-520 (holding that

“different standing requirements are accorded to different areas of the law,” and finding that

because corporate law applied to the action, citizens did not have standing to challenge

actions by a corporation).

¶22.    In Mississippi, a shareholder may not institute a derivative suit unless certain statutory

conditions are met. 3 Miss. Practice Encyclopedia of Miss. Law § 22:210 (2d ed. 2017).

Mississippi Code Section 79-4-7.41(1) (Rev. 2013) provides that a shareholder may not

commence a derivative suit unless he or she was a shareholder at the time of the act or

omission in question. Mississippi Code Section 79-4-7.41(2) requires that the shareholder

fairly and adequately represent the interests of the corporation. Furthermore, Mississippi

Code Section 79-4-7.42 (Rev. 2013) requires the complaining shareholder to make a written

demand upon the corporation or appropriate officers prior to commencing the proceeding,

and section two of that statute requires ninety days to elapse after the written notice, unless

the corporation earlier rejects the demand, or unless irreparable injury to the corporation

would result by waiting for the ninety-day period to elapse. Finally, our caselaw requires that

the corporation is made a party to the derivative action. See Bruno, 385 So. 2d at 622 (“The

corporation is an indispensable party” to a shareholder derivative action); see also Fairchild

v. Keyes, 448 So. 2d 292, 294 (Miss. 1984) ([T]he corporation is an indispensable party to

a suit brought to protect its interest . . . .”).

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¶23.   “The rationale for these procedural prerequisites has to do with the corporation’s

status as a creature of the State.” 3 Miss. Practice Encyclopedia Miss. Law § 22:210 (2d ed.

2017). “Since the corporation is a separate entity, the shareholder has no legal interest in any

of its property.” Id. These conditions “avoid multiple lawsuits, preserve creditors’ rights

since any recovery will belong to the corporation, and provide for any recovery to benefit all

shareholders.” Id.

¶24.   Richard failed to satisfy the statutory conditions required of shareholder derivative

actions. Notwithstanding, Richard argues that, even if his action is considered a shareholder

derivative action, the chancery court has discretion to disregard the procedural prerequisites

and treat the claim as a direct action if it makes certain findings under the Derouen doctrine.

Derouen v. Murray, 604 So. 2d 1086, 1091 n.2 (Miss. 1992). The trial court declined to

address the question of whether Richard’s action was a shareholder derivative action, and

never made any findings under Derouen. In Derouen, this Court did not overrule Bruno,

but stated in a footnote that

       [i]n the case of a closely held corporation . . . , the [chancery] court in its
       discretion may treat an action raising derivative claims as a direct action,
       exempt it from those restrictions and defenses applicable only to derivative
       actions, and order individual recovery, if it finds that to do so will not (i)
       unfairly expose the corporation or the defendants to a multiplicity of actions,
       (ii) materially prejudice the interests of creditors of the corporation, or (iii)
       interfere with a fair distribution of the recovery among all interested persons.

Derouen, 385 So. 2d at 622. This Court later interpreted the Derouen doctrine to hold “that

in derivative suits involving closely held corporations, the trial court may award damages on

an individual basis, provided certain safeguards are met.” Investor Res. Servs., Inc. v. Cato,

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15 So. 3d 412, 424 (Miss. 2009). Indeed, the facts of Derouen involved a shareholder

seeking individual recovery for his fifty-percent equity interest in proceeds from the business.

Derouen, 604 So. 2d at 1089-90.

¶25.   Here, Richard is not seeking individual recovery or individual damages. Rather, he

has brought an action to enforce corporate bylaws. The Derouen doctrine does not apply

because Richard does not seek individual recovery, but rather seeks to redress alleged wrongs

to the three corporations.

¶26.   The holding in Bruno applies in this case. Richard lacked standing to bring suit

because the right belongs to the three corporations. It is of no consequence that Richard

owns half of the shares of stock, as Bruno explicitly applies to closely held corporations,

where “the complaining stockholder owns all or substantially all of the stock of the

corporation.” Bruno, 385 So. 2d at 622. Accordingly, Richard lacked standing under Bruno

to assert a claim individually on behalf of the corporations.

                                      CONCLUSION

¶27.   Richard lacked standing to bring suit on behalf of the three corporations, because the

injury for which he seeks relief, and the gravamen of this matter, pertains to the corporations

only. Therefore, the Court reverses and remands the trial court’s judgment, and subsequent

orders related to that judgment, for proceedings consistent with this opinion.

¶28.   REVERSED AND REMANDED.

    WALLER, C.J., KITCHENS, P.J., KING, COLEMAN, MAXWELL, BEAM,
CHAMBERLIN AND ISHEE, JJ., CONCUR.

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