DAVE VINSON v. BERNIE KOERNER; JASON KOERNER; STEVEN HARPER; GAIL BROSSART; AND VINSON & KOERNER, INC.
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RENDERED:
NOVEMBER 9, 2001; 10:00 a.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
2000-CA-001217-MR
DAVE VINSON
v.
APPELLANT
APPEAL FROM CAMPBELL CIRCUIT COURT
HONORABLE LEONARD L. KOPOWSKI, JUDGE
ACTION NO. 97-CI-00665
BERNIE KOERNER; JASON KOERNER;
STEVEN HARPER; GAIL BROSSART;
AND VINSON & KOERNER, INC.
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
KNOPF, SCHRODER, AND TACKETT, JUDGES.
TACKETT, JUDGE:
Dave Vinson appeals from an order of the
Campbell Circuit Court dismissing his lawsuit against the
appellees on the basis that his lawsuit, which is purported to be
a shareholders derivative action on behalf of Vinson & Koerner
Hauling, Inc. (Vinson & Koerner Hauling), was improperly brought
in his individual capacity.
In early 1997 Vinson and appellee, Bernie Koerner,
formed a business which invested in trucks for hauling water and
gravel.
While each individual initially invested $40,000.00 in
the company, by agreement the investment was promptly reduced to
$30,000.00 by returning $10,000.00 to each of them.
At that
point Koerner contacted an attorney and Vinson & Koerner Hauling,
Inc. was formed.
Vinson was to be president of the company and
have full responsibility for maintaining the company trucks and
hiring the truck drivers.
company.
Koerner was to be the treasurer of the
Early in the operation, Bernie Koerner transferred his
shares in the business to his son, appellee Jason Koerner.
Apparently Vinson and Jason were to each receive $300.00 per
month, and profits were to be divided equally.
Almost immediately the business relationship between
Vinson and the Koerners began to deteriorate.
It appears that
Vinson’s chief complaints were that Bernie attempted to tell him
where to park his truck, when he could load water, refused to pay
his cell phone bill, overcharged him for gas, and refused to pay
him additional amounts for hauling water.
From Bernie’s
perspective, however, the business relationship began to break
down because, among other things, Vinson refused to turn over
receipts, refused to report on his hauls, and refused to purchase
water from Bernie’s water fill station.
By May 1997 the corporation was effectively no longer
in operation.
Vinson, in fact, had by then formed his own
company, Vinson Hauling, and was using the corporation’s trucks,
phone numbers, and customer list in his new business.
this time several things happened:
During
Jason transferred his shares
back to Bernie; the parties reached an agreement to park the
trucks; Vinson disabled and damaged the trucks; Vinson also
attempted to file liens against the trucks; Vinson was removed
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from the board of directors; Vinson resigned as president of the
corporation; and, Vinson called a shareholders’ meeting which
Jason and Bernie refused to attend.
On May 30, 1997, Vinson filed a “Petition for
Dissolution of Corporation” to dissolve Vinson & Koerner Hauling
on the basis that the shareholders were deadlocked.
In the
caption, Vinson was identified as the plaintiff, and Vinson &
Koerner Hauling was identified as the defendant.
The petition
sought the dissolution of the company, an injunction ceasing all
activities of Vinson & Koerner Hauling, an equal division of the
assets and liabilities of the company, and a judgment of
$2,794.00 for wages and water hauling fees.
It is evident that sometime during the period from May
through August 1997, through Bernie Koerner’s efforts, the
corporation transferred title of the company vehicles to Bernie.
According to Vinson, the prices paid by Bernie for the vehicles
was less than their fair market value and, moreover, Vinson
claims that during this time he made advantageous offers to
buyout Bernie which were improperly rejected.
On August 27, 1997, Vinson filed an “Amended
Complaint.”
In the caption of the amended complaint, Vinson
identified himself as the plaintiff and Bernie Koerner, Steven
Harper, and Gail Brossart as defendants.
Among other things, the
amended complaint alleged Bernie Koerner misused the corporate
assets and breached his fiduciary duty to the corporation and to
Vinson.
In response, the defendants’ motion to dismiss pointed
out that Vinson’s amended complaint purported to be a
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shareholder’s derivative action, however, that Vinson had failed
to name the company as the plaintiff, and had brought the action
in his own name and individual capacity.
The trial court denied
the motion to dismiss.
Subsequently in March of 1999, the defendants renewed
their motion to dismiss again arguing that Vinson had failed to
comply with technical requirements of a shareholder’s derivative
suit.
Vinson’s response to the motion to dismiss stated, “The
Amended Complaint in the first paragraph adopted and reiterated
each and every allegation of the original and first Amended
Complaint.
Thus, Vinson & Koerner Hauling, Inc. was never
dropped as a party Defendant.”
Several paragraphs later, Vinson
states, incongruously, “The Plaintiff did bring the action for
the Corporation.
The Corporation is a party.”
In the caption,
Vinson was listed as the plaintiff, and Bernie Koerner, Harper,
and, Gail Brossart were listed as defendants, although it is
clear that by this time Jason Koerner had been substituted in the
place of Gail Brossart who was no longer a defendant.
On April
19, 1999, the trial court entered an order denying the motion to
dismiss.
Though Kentucky Rule of Civil Procedure (CR) 12.01
requires a defendant to serve his answer within twenty days after
service of the summons, on June 5, 1999, defendants Bernie and
Jason Koerner and Steven Harper filed an “Answer and
Counterclaim.”
The answer again raised as an affirmative defense
that Vinson’s lawsuit had not been brought on behalf of the
proper party in interest, i.e., Vinson & Koerner Hauling.
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The
defendants’ counterclaim, in behalf of Vinson & Koerner Hauling,
sought damages from Vinson for appropriating and damaging
corporate property, receivables, and business of the corporation.
Vinson timely answered the counterclaim.
On September 9, 1999, Vinson again filed a motion to
amend his complaint, this time seeking a declaration from the
court that their business relationship was a de facto
partnership, that Vinson & Koerner Hauling was a sham
corporation, was acting ultra vires, and finally was not properly
instituted, organized or operated as a corporation.
Vinson
further claimed each of the defendants breached their duty to him
by borrowing funds, selling assets, and exercising authority over
the business assets contrary to the best interest of the
business; and that Vinson had been injured by the defendants’
negligent, reckless, careless, and wanton acts.
Following the
defendants’ reply, the trial court entered an order denying the
motion to amend.
On January 2, 2000, the defendants filed for summary
judgment, asserting again that Vinson had failed to properly
bring a shareholders derivative lawsuit.
In response, Vinson
filed a motion for summary judgment citing Pepper v. Litton, 308
U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939).
Vinson argued that
his action was proper because his “action is a direct action
against the dominant and controlling stockholder and directors
who breached the fiduciary duty owed to him.”
Vinson also noted
that he had brought an action against the company, that the
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company was properly served and never filed an answer, and sought
a default judgment against the company.
Following replies by the parties, the trial court
entered an order stating that it was treating the defendants’
motion for summary judgment as a motion to dismiss, and dismissed
Vinson’s claims against the defendants, as well as the
defendants’ counterclaims.
In its order, the trial court
determined that Vinson had filed what purported to be a
shareholders derivative action on behalf of Vinson & Koerner
Hauling, but had brought the action in his individual capacity
and, contrary to Kentucky Revised Statutes (KRS) 271B.7-400, had
failed to name Vinson & Koerner Hauling as a party to the case.1
The trial court further stated that “Kentucky law . . . is clear
to the effect that one shareholder cannot directly sue another
for damage allegedly done to the corporation,” and that “[t]he
fiduciary obligation is to the corporation, and the only way that
a shareholder can have those activities enforced or challenged is
to have a shareholders derivative action brought on behalf of the
corporation.”
This appeal followed.
Vinson does not contend that he brought a proper
shareholder derivative lawsuit; rather, he contends that, as a
stockholder, he was entitled to bring an action against the
appellees in his own right.
We disagree.
The selection of the form of business (i.e., sole
proprietorship, partnership, or corporation) is a decision of
1
In the caption of the order, Vinson and Koerner Hauling was
identified as a defendant in the case.
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utmost importance in establishing a business.
That decision
requires weighing numerous factors including tax laws and the
consequences thereof, limitation of personal liability, and
spreading the amount of potential risk and profit among one or
more principals to determine which form is best for a given
individual, group, or company.
Vinson has not cited controlling Kentucky statutory or
case law which impose a fiduciary duty between shareholders in a
closely-held corporation.
These duties which are recognized by
law create liability upon corporate directors or officers to the
corporation, not individual directors, officers, or shareholders.
Vinson relies primarily upon Pepper, supra, which has no
application to this case.
Pepper, a federal bankruptcy case, was
an attempt by the trustee of a bankrupt corporation to set aside
a judgment in favor of the sole shareholder of the corporation
against the corporation which had been improperly obtained by the
shareholder as an artifice to avoid paying an adverse judgment in
a pending lawsuit against the corporation seeking to obtain
payment for unpaid royalties.
It is stated in Pepper that:
A director is a fiduciary. Twin-Lick Oil Co.
v. Marbury, 91 U.S. 587, 588. So is a
dominant or controlling stockholder or group
of stockholders. Their powers are powers in
trust. Their dealings with the corporation
are subjected to rigorous scrutiny and where
any of their contracts or engagements with
the corporation is challenged the burden is
on the director or stockholder not only to
prove the good faith of the transaction but
also to show its inherent fairness from the
viewpoint of the corporation and those
interested therein. The essence of the test
is whether or not under all the circumstances
the transaction carries the earmarks of an
arm's length bargain. If it does not, equity
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will set it aside. While normally that
fiduciary obligation is enforceable directly
by the corporation, or through a
stockholder's derivative action, it is, in
the event of bankruptcy of the corporation,
enforceable by the trustee. For that standard
of fiduciary obligation is designed for the
protection of the entire community of
interests in the corporation--creditors as
well as stockholders. (Footnotes omitted.)
(Citations omitted.)
Id. At 308 U.S. 306-307, 60 S.Ct. 245, 84 L.Ed. 289 - 290.
As stated in the excerpt, a fiduciary obligation is
normally enforceable directly by the corporation or through a
stockholder’s derivative action, however it says nothing about
the obligation being enforced by a shareholder directly against
another shareholder.
Contrary to Vinson’s position, Pepper does
not hold that a shareholder may bring a lawsuit directly against
another shareholder.
Vinson’s alternative argument is that we adopt Justice
Leibson’s dissent in the case Estep v. Werner, Ky., 780 S.W.2d
604 (1989).
Justice Leibson urged Kentucky to adopt as a
standard of conduct reasonably owed from one co-shareholder to
another in a closely-held corporation, the rule stated in
Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass.
578, 328 N.E.2d 505, 515 (1975):
"[W]e have defined the standard of duty owed
by partners to one another as the [single]
'utmost good faith and loyalty.' [citations
omitted]. Stockholders in close corporations
must discharge their management and
stockholder responsibilities in conformity
with this strict good faith standard. They
may not act out of avarice, expediency or
self-interest in derogation of their duty of
loyalty to the other stockholders and to the
corporation."
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Justice Leibson noted as of that time twenty-one
jurisdictions had judicially adopted this standard.
In his
brief, Vinson cites seven judicial decisions and twenty-four
statutes wherein this, or a similar rule has been adopted.
While
the majority in Estep did not explicitly reject the notion of a
direct action by one shareholder in a closely-held corporation
against another and, stated to the contrary, “there may be
certain nonstatutorily imposed fiduciary duties that exist among
shareholders in closely-held corporations,” it nevertheless did
not adopt Justice Leibson’s proposal.
We are bound by established precedents of the Kentucky
Supreme Court.
The Court of Appeals cannot overrule
established
precedent set by the Kentucky Supreme Court or its predecessor
court.
Special Fund v. Francis, Ky., 708 S.W.2d 641, 642 (1986).
However, this rule has not prevented an intermediate appellate
court from considering the viability of a cause of action where
the issue has not been definitively resolved by the Kentucky
Supreme Court.
See
S.W.2d 438 (1998).
Oakley v. Flor-Shin, Inc., Ky.
App., 964
While the issue of whether one shareholder in
a closely-held corporation may bring a direct cause of action
against another shareholder for a violation of a duty owed by one
shareholder to another was not definitively resolved by the
Kentucky Supreme Court in Estep, nevertheless, in light of the
rejection of Justice Leibson’s position proposed in his dissent,
we must reject Vinson’s invitation to adopt it now.
Vinson next contends that Jason Koerner violated his
duty as an officer and shareholder when he transferred his shares
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of the corporation stock back to his father two days prior to a
duly and properly noticed shareholders’ meeting, but without
notice to Vinson pursuant to KRS 271B.12-020(4), and thereby
making Jason liable to Vinson pursuant to KRS 446.070.
Aside
from the problems with suing a fellow shareholder as previously
discussed, we note that KRS 271B.12-020(4) provides that:
The corporation shall notify each
shareholder, whether or not entitled to vote,
of the proposed shareholders' meeting in
accordance with KRS 271B.7-050. The notice
shall also state that the purpose, or one of
the purposes, of the meeting is to consider
dissolving the corporation.
We cannot agree with Vinson that this statute required Jason
Koerner to provide notice to him prior to selling his shares to
Bernie Koerner.
Finally, Vinson contends that Bernie Koerner defrauded
him when he refused Vinson’s offer to buy him out, and then set
out on a course to destroy the corporation.
For the reasons
previously discussed, Vinson does not have a personal cause of
action against Bernie Koerner to redress these allegations.
“Improper manipulation of funds by the controlling stockholder
creates a cause of action in favor of the corporation rather than
in favor of a stockholder as an individual, as does a wrongful
diversion of corporate assets.” Security Trust Co. v. Dabney,
Ky., 372 S.W.2d 401, 403 (1963) (quoting 13 Fletcher, Cyclopedia
of Corporations, § 5924, pp. 395-396.)
To summarize, we agree with the trial court that the
proper cause of action to redress the alleged wrongs of Bernie
Koerner and the other appellees was a shareholders derivative
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lawsuit.
Upon the recovery by the corporation of any
misappropriated property and/or damages from the appellees,
Vinson could then recover any amounts due him upon the settling
of the financial affairs of the company following its
dissolution.
For the foregoing reasons the judgment of the Campbell
Circuit Court is affirmed.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEES:
Robert E. Blau
Jolly, Blau, Kriege & Turner
Cold Spring, Kentucky
Steven L. Schiller
Gail Brossart & Steve Harper
Newport, Kentucky
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