Farrel v. Mountain Folk, Inc.

Farrell v. Mountain Folk, Inc.  (98-228); 169 Vt. 568; 730 A.2d 597

[Filed 01-Apr-1999]


                                 ENTRY ORDER

                       SUPREME COURT DOCKET NO. 98-228

                             JANUARY TERM, 1999


Theda E. Farrell	              }	    APPEALED FROM:
                                      }
                                      }
     v.	                              }	    Bennington Superior Court
                                      }	
Mountain Folk, Inc., Kenneth J.	      }
Farrell and Paula J. Sweeney	      }	    DOCKET NO. 193-06-95 Bncv


             In the above-entitled cause, the Clerk will enter:

       Plaintiff Theda Farrell appeals the dismissal of her superior court
  action to gain access to  corporate records and obtain an accounting for
  alleged diversion of corporate funds.  The court  granted defendants
  Mountain Folk, Inc., Kenneth Farrell, and Paula J. Sweeney's motion to 
  dismiss based on collateral estoppel (issue preclusion).  On appeal,
  plaintiff argues that issue  preclusion does not apply to this action and
  that the case should be remanded for trial.  We agree  and therefore,
  reverse and remand.
       
       In August, 1993, plaintiff and defendants Farrell and Sweeney formed a
  corporation,  Mountain Folk, Inc., (d/b/a The Village Fare), as a
  wholesale/retail bakery and delicatessen  serving light meals and providing
  catering services.  Plaintiff served as a director, secretary and 
  shareholder with 20% of the stock.  Plaintiff's husband at that time,
  Farrell, also served as  director, officer and shareholder with 30% of the
  shares.  Sweeney was elected a director, officer  and shareholder with 50%
  of the stock shares.  Sweeney and Farrell were involved in the day-to-day
  business operations.     

       The marriage between plaintiff and Farrell deteriorated, and in July,
  1994, plaintiff filed  for divorce.  During divorce proceeding, plaintiff
  filed suit in superior court against Mountain  Folk, Inc., Farrell, and
  Sweeney, claiming misappropriation of corporate funds for the personal 
  benefit of Farrell and Sweeney.  In her pleadings, plaintiff requested
  access to all financial,  accounting and corporate records.  Plaintiff's
  civil complaint was later amended  to include  allegations that Farrell had
  admitted to (1) not reporting cash from sales of the business, (2)  writing
  checks from the business for personal items, and (3) signing his personal
  tax return  knowing that the information was not correct.  Plaintiff also
  claimed that Sweeney had written  personal checks from the business and
  that Farrell had admitted that he and Sweeney split $12,000  in cash from
  the corporate safe in 1994.

       Under V.R.C.P. 53, a mutually-agreed-upon master, an accountant, was
  appointed by the  family court to estimate the fair market value of the
  corporation.  In a letter outlining the terms  of the agreement to perform
  the business evaluation, the master stated, "We will not audit . . .  tax
  returns, forecasts, or financial data. . . . Our engagement cannot be
  relied on to disclose  errors, irregularities, or illegal acts, including
  fraud or defalcations, that may exist."  The  master's report stated that
  the valuation was performed for the purpose of "an equitable  distribution
  of marital assets in a pending divorce action" and determined a net value
  of the 

       
 


  corporation of $51,886, with plaintiff's share at $9,844 and Farrell's
  share at $15,543.  

       In its opinion and order dated October 22, 1996, the family court
  stated that Farrell's  income was determined "without accounting for
  unreported income."  Further, the court noted  that plaintiff had an action
  pending in superior court "to gain access to all corporate records and  to
  obtain an accounting for diversion of the funds, if any," and was also
  seeking to limit "any civil  or tax liability."  The family court
  incorporated the master's findings of fact into the opinion and  order,
  including the valuation of the corporation, and determined that plaintiff
  should transfer her  shares of Mountain Folk, Inc. to Farrell for the sum
  of $9,844 within thirty days of the order.

       In December, 1996, defendants renewed their motion to dismiss in
  superior court on the  grounds that the suit was moot and plaintiff lacked
  standing because her stock had been transferred  to Farrell as a result of
  the divorce judgment.  This motion was denied in May, 1997.  In  February,
  the court granted defendants' motion to amend their answer to include res
  judicata as  an affirmative defense.  As a result of that same hearing, the
  court, based on its belief that  defendants had a pending motion to dismiss
  from December, 1996, dismissed plaintiff's complaint  with prejudice to all
  named defendants.  In denying plaintiff's motion to reconsider, the court 
  stated that it was precluded from addressing the issues presented by
  plaintiff, noting that "all of  the issues which the Plaintiff raises in
  its motion come down to one salient point. . . . the value  of Mountain
  Folk stock.  That issue was fully, finally, necessarily and fairly resolved
  by the  family court."  This appeal follows.

       The determination of collateral estoppel based on a set of facts is a
  question of law and  therefore we review de novo the trial court's decision
  in this matter.  See State v. Pollander, 167  Vt. 301, 304, 706 A.2d 1359,
  1360 (1997).  Collateral estoppel or issue preclusion "bars a party  from
  relitigating an issue decided in a previous action."  Id. (internal
  quotations omitted).  The  elements of issue preclusion, all of which must
  be present, are:
  
        (1) preclusion is asserted against one who was a party or in privity 
        with a party in the earlier action;
        (2) the issue was resolved by a final judgment on the merits;
        (3) the issue is the same as the one raised in the later action;
        (4) there was a full and fair opportunity to litigate the issue in the
        earlier action; and
        (5) applying preclusion in the later action is fair.

  Trepanier v. Getting Organized, Inc., 155 Vt. 259, 265, 583 A.2d 583, 
  587 (1990).

       The second Trepanier factor requires that the issue be resolved "by a
  final judgment on the  merits" in the prior proceeding.  See Pollander, 167
  Vt. at 304, 706 A.2d  at 1361; American  Trucking Ass'ns v. Conway, 152 Vt.
  363, 369, 566 A.2d 1323, 1327 (1989) (issue preclusion  appropriate only
  where issue was necessary to resolution of prior action).  The party
  asserting  preclusion bears the burden of pinpointing for the Court the
  exact issues previously litigated.  See  Pollander, 167 Vt. at 305, 706 A.2d  at 1361.  

       Defendants have failed to satisfy their burden.  We recognize that the
  issues properly to be  tried in this action may have narrowed when
  plaintiff turned over her stock to Farrell, but we need  not resolve the
  proper scope of the action now.  Plaintiff's claim of potential personal
  civil or tax  liability clearly remains alive and was not resolved in the
  divorce.  The claim of pilfering  corporation funds may remain alive if
  plaintiff can show injury to herself, not the corporation,  unconnected to
  the value of the shares.
        
   
 


  Reversed and remanded.    



                                       FOR THE COURT:

                                    

                                       _______________________________________
				       Jeffrey L. Amestoy, Chief Justice

                                       _______________________________________
                                       John A. Dooley, Associate Justice

                                       _______________________________________
                                       James L. Morse, Associate Justice

                                       _______________________________________
                                       Denise R. Johnson, Associate Justice

                                       _______________________________________
                                       Marilyn S. Skoglund, Associate Justice