Danuser v. IDA Marketing Corp.

Citations: 2013 ND 196; 838 N.W.2d 488; 2013 N.D. LEXIS 198; 2013 WL 5819277Docket: 20120443

Court: North Dakota Supreme Court; October 30, 2013; North Dakota; State Supreme Court

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Reed H. Danuser successfully appealed against IDA Marketing Corporation, IDA of Moorhead Corporation, and James Leach, resulting in a judgment that held them jointly and severally liable for $692,671.78. This amount included damages related to Danuser's termination as president and CEO, as well as Leach's breach of fiduciary duty. Additionally, IDA of Moorhead was ordered to pay Danuser $130,727.99 for loans he extended to the corporation.

Prior to 1994, Leach was the president and majority shareholder of IDA Moorhead, a company he founded in 1977. In 1994, Danuser and three other managers took over daily operations, leading to the formation of IDA Marketing to acquire Leach’s shares. They executed several key agreements, including a stock purchase agreement, which stipulated that Leach sold 2,421,118 shares to IDA Marketing for 31 cents each, with a total of 3,794,500 shares outstanding. The agreement required IDA Marketing to pay for the shares through a capital debenture, with an 8% interest rate, and included provisions for Leach to retain a security interest in the shares until payment was completed. Default on payments would result in immediate repayment of the principal and interest, and the return of the stock to Leach.

The shareholder control agreement indicated that both corporations would share the same board of directors and leadership, with Kruse as CEO. This agreement allowed for termination of the CEO for cause and outlined board composition, which included members appointed by both Leach and Kruse. The agreement also noted that the remaining shares of IDA Marketing were held by approximately 73 other shareholders, who were offered a chance to sell their shares under a Confidential Exchange Offer Memorandum.

A marketing agreement between IDA Marketing and IDA Moorhead established IDA Moorhead's continued production of specialized mobile radio equipment, while IDA Marketing was tasked with its marketing and sales. IDA Marketing's compensation included reimbursement for salaries, expenses, stock purchases from Leach and other shareholders, and funds for other operational needs. A buy and sell agreement executed by IDA Marketing and its shareholders outlined payment protocols for departing shareholders in various circumstances, including valuation and redemption schedules.

Kruse served as president and CEO from 1994 to 2004, during which IDA Marketing's payments for debentures to James Leach were irregular. In March 2004, Leach issued a notice of default for these payments but later withdrew it after corporate restructuring. Danuser succeeded Kruse as president and CEO, and amendments to the shareholder control agreement allowed for easier share transfers among IDA Marketing shareholders. Danuser became the majority shareholder and loaned $97,000 to IDA Moorhead, while sporadic payments continued to Leach, and Danuser received minimal loan repayments.

In 2010, Leach claimed a default on debenture payments and requested full payment. Danuser informed him of the corporations' financial incapacity to fulfill this request. A joint board meeting on November 17, 2010, resulted in Danuser's termination as president and CEO due to "improper use of corporate funds" and "self-dealing." His termination stemmed from issuing new shares to himself without proper authorization and transferring assets beyond the allowed limits, violating the Shareholder Control Agreement. Additionally, Danuser's actions led to breaches of obligations to Leach under several agreements, adversely affecting IDA Marketing's financial health.

James Leach orchestrated the termination of Danuser as president and CEO of the corporations, claiming a need to protect the business from potential bankruptcy if he foreclosed on a deal. Following Danuser’s termination at the November 17 board meeting, Leach was appointed as his successor. Subsequently, on November 24, 2010, Leach and other shareholders declared payment defaults on their stock in IDA Moorhead and requested waivers for curing the defaults, allowing them to repossess the stock pledged as security for a debt. This stock was later sold for $1,180,000. Danuser filed a lawsuit against the corporations and the directors, alleging wrongful termination without cause and breaches of fiduciary duty, as well as seeking recovery for personal loans he made to the corporations. The district court granted Danuser partial summary judgment, confirming his employment contract allowed termination only for cause, and ruled he was owed $97,000 for his loans. After a bench trial, the court found Danuser was wrongfully terminated, with James Leach personally breaching his fiduciary duty, while the other directors did not. The court highlighted that Leach was in control of the circumstances leading to Danuser’s termination and acted out of concern for the company’s financial state.

Danuser was denied the opportunity to pay a balance due upon his termination, despite having paid significant debenture amounts totaling $805,209.02, exceeding his salary during the same period. Leach’s wife also received $469,774.24 for her stock. Written notice of default was only provided on November 24, 2010, with a special board meeting held shortly after, where Danuser received no notification. At this meeting, Leach orchestrated Danuser's removal, appointed a new board member, waived further notice of default, and reclaimed Danuser’s IDA Moorhead stock, becoming president with a salary of $52,800 per year. These actions marked the decline of IDA Marketing, resulting in the forfeiture of the debenture payments made. Leach later reissued stock to himself and others, preparing the financially solid business for sale, which had generated a net profit of $363,298 in the six months ending January 31, 2011. By April 2011, Leach reported strong financials and recommended a sale, which was unanimously approved, leading to a sale price of $1,180,000.

Danuser had sustained the business through hard work and sacrifices with the expectation of continued employment and ownership. However, after the company became profitable, Leach sought to exclude Danuser under false pretenses, failing to provide the 90-day cure period stipulated in their agreements. This breach of duty and the lack of good faith and fair dealing resulted in Leach profiting significantly at Danuser's expense, leading to Danuser losing his job and share in the business proceeds, contradicting Leach's fiduciary obligations.

The district court found the corporations and James Leach jointly and severally liable to Danuser for $567,200 related to his lost interest in IDA Marketing, $47,000 for unpaid salary and benefits prior to the sale of IDA Moorhead, and $130,727.99 for loans Danuser made to IDA Moorhead. Leach contends the court erred in determining he breached a fiduciary duty to Danuser, arguing that his fiduciary obligations as a director were owed to the corporations and shareholders collectively, not to individual shareholders like Danuser. He alleges a lack of direct contractual or special obligations to Danuser, asserting the court incorrectly assumed he was a co-shareholder. The appeal addresses the duties of corporate directors towards shareholders under the North Dakota Business Corporation Act (N.D.C.C. ch. 10-19.1), which outlines standards of conduct and remedies for violations. The interpretation of these statutory provisions is a legal question subject to full review on appeal, with courts applying the plain meaning of statutory language unless ambiguity necessitates external interpretation. The Act imposes a duty on corporate officers and directors to act in good faith and provides protections for minority shareholders against fraudulent or prejudicial actions. Directors are required to manage corporate affairs in good faith and with the care that a prudent person would exercise in similar circumstances.

Section 10-19.1-85.1, N.D.C.C. permits courts to grant equitable relief to shareholders if a corporation, officer, or director violates N.D.C.C. ch. 10-19.1. Shareholders can initiate actions in the right of a corporation under Section 10-19.1-86, and dissenting shareholders have rights to fair value for their shares as outlined in Sections 10-19.1-87 and 10-19.1-88. Notably, Section 10-19.1-115(1)(b)(3) allows shareholders in closely-held corporations to seek judicial relief if directors act unfairly toward them, with courts empowered to grant equitable relief or dissolve the corporation.

In general corporate law, shareholders must typically pursue derivative actions for corporate injuries. However, minority shareholders in closely-held corporations can file direct actions if they demonstrate harm unique to them or a breach of a special duty. The court has upheld that minority shareholders have remedies under the Business Corporation Act, including protections against majority oppression.

A "closely held corporation" is defined as having no more than thirty-five shareholders. Characteristics of close corporations include a small number of shareholders, personal relationships among them, active participation in the business, and a lack of a market for corporate stock. The existence of fiduciary duties in these corporations is based on the power dynamics rather than shareholder majority or minority status.

IDA Marketing, a closely-held corporation with fewer than thirty-five shareholders, is involved in a legal dispute where Danuser, a shareholder and executive of both IDA Marketing and IDA Moorhead, claims damages for wrongful termination and alleges he was unfairly excluded from the corporations. These claims include a derivative action on behalf of IDA Marketing and a personal shareholder claim for damages resulting from his exclusion.

The legal context references a previous case, Kortum, where similar claims were made by a shareholder and at-will employee against other shareholders for wrongful expulsion. The court found that the termination warranted an examination of whether the corporation acted unfairly toward the shareholder.

Under North Dakota Century Code (N.D.C.C.) 10-19.1-115(1)(b)(3), it is established that shareholders in closely-held corporations may seek equitable relief if directors act in a manner that is unfairly prejudicial. This code provision supports Danuser's claims against James Leach, a director who has a fiduciary duty to avoid acting unfairly toward shareholders.

Leach's argument, based on a previous case (Production Credit Ass’n v. Ista), asserting that a director's obligations are to the corporation and all shareholders collectively, is deemed inappropriate in this context. The Ista case focused on fiduciary duties within a loan transaction and did not address issues related to the exclusion of a shareholder in a closely-held corporation. Additionally, the cases cited by Leach do not align with the specific statutory provisions relevant to Danuser's claims regarding shareholder exclusion.

In McLaughlin v. Schenk, the Utah Supreme Court affirmed that directors owe fiduciary duties of good faith, prudent care, and acting in the best interests of the corporation, highlighting differences in fiduciary obligations between closely-held and publicly-held corporations. The Texas Court of Appeals in Redmon v. Griffith noted that while corporate officers have a fiduciary duty to shareholders collectively, individual shareholders may pursue personal claims for individual wrongs. North Dakota Century Code chapter 10-19.1 establishes broader fiduciary duties for directors of closely-held corporations, allowing shareholders to seek equitable relief for actions that unfairly prejudice them. The court rejected James Leach's argument that directors owe duties only to the corporation and shareholders collectively, clarifying that he had a fiduciary duty towards Danuser not to unfairly prejudice him. Whether Leach violated this duty is a factual determination reviewed under a "clearly erroneous" standard, where the district court's findings are upheld unless they stem from an erroneous legal view or lack evidentiary support. The appellate court respects the district court's credibility assessments and does not reweigh evidence or substitute its judgment.

James Leach was found by the district court to have wrongfully terminated Danuser and breached a fiduciary duty, effectively freezing Danuser out of corporate interests. The court determined that this conduct unfairly prejudiced Danuser, and the evidence supported the findings without clear error under N.D.R.Civ. P. 52(a). Leach contested the remedy, arguing that Danuser's share of proceeds from the sale of IDA Moorhead was incorrectly calculated based on a buy-sell agreement, which he claimed entitled Danuser to only about $72,000. However, Danuser countered that the agreement did not apply since Leach wasn't a party to it, asserting the court had the discretion to award fair value for his shares.

Under N.D.C.C. § 10-19.1, the district court has broad equitable powers to address violations by directors. The court can grant any equitable relief deemed just, including remedies for breaches of fiduciary duty, and its decisions are reviewed under an abuse-of-discretion standard. Leach's non-party status to the buy-sell agreement was acknowledged, and the court's damages determination was upheld as neither a misapplication of law nor arbitrary.

IDA Moorhead argued against joint and several liability for Leach’s actions and claimed the damages should be divisible among defendants. However, Danuser's complaint requested broad equitable relief, leading to the conclusion that the district court's remedy did not exceed what was sought.

Corporations are recognized as artificial entities that operate through their directors, officers, and agents, and under North Dakota Century Code (N.D.C.C.) chapter 10-19.1, they can be held liable for the actions of their directors. Courts have discretion to grant equitable relief deemed just and reasonable in specific circumstances, as outlined in N.D.C.C. 10-19.1-115(1)(b)(3). In the case at hand, both James Leach and IDA Moorhead benefited from actions taken by Leach, which were attributed to the corporation. IDA Marketing, now defunct, was closely linked with IDA Moorhead and did not contest the court’s ruling on joint and several liability. The district court found that Leach controlled the corporations when he violated his fiduciary duties to Danuser. The court's determination that Leach and the corporations were jointly and severally liable for Danuser’s damages was upheld, with no evidence of misapplication of law or abuse of discretion. The judgment by the district court was affirmed. Justice Crothers dissented, arguing that N.D.C.C. 10-19.1-115 is improperly applied in this context, emphasizing its specific focus on involuntary dissolution rather than general liability for shareholder actions. Overall, the majority supported the imposition of liability on Leach based on his fiduciary responsibilities to shareholders in a closely-held corporation.

The excerpt outlines various provisions related to the dissolution of corporations under North Dakota law, specifically referring to sections 10-19.1-110.1 to 10-19.1-121. Key points include:

- **Dissolution Procedures**: Sections detail procedures for corporate dissolution, including lack of notice to creditors, revocation of dissolution proceedings, and filing requirements for articles of dissolution.
- **Supervised Dissolution**: Provides for both involuntary and supervised voluntary dissolution, including the qualifications and powers of receivers involved in the dissolution process.
- **Claims and Legal Actions**: Discusses filing claims during dissolution proceedings and actions that can be initiated by the attorney general.
- **Historical Context**: Section 10-19.1-115 is noted to have replaced N.D.C.C. 10-21-16, which previously governed the liquidation of corporate assets and business under certain conditions, such as shareholder deadlock or insolvency.
- **Liability Concerns**: The author expresses concern over the majority's interpretation of the laws imposing broad liability on directors to individual shareholders, arguing it exceeds the intended scope of the statutes.
- **Damages and Fault**: There is a discussion on the allocation of damages in light of modified comparative fault provisions, emphasizing a shift from joint and several liability to proportional fault allocation among tortfeasors.
- **Fiduciary Duty as Tort**: The excerpt indicates that claims regarding breaches of fiduciary duty are treated as torts, particularly regarding the pursuit of punitive damages, though this issue remains unaddressed in the majority's opinion.

The author concludes by stating that they would reverse the decision without addressing the damages question, suggesting the resolution of this matter may need to be considered in the future.