Opinion
NO. 2011-CA-002335-MR
04-19-2013
STEVEN CRAIG SCHWARTZ APPELLANT v. DANIEL K. COYLE AND AMERICAN SCALE CORPORATION APPELLEES
BRIEFS FOR APPELLANT: David B. Mour R. Kenneth Kinderman Louisville, Kentucky BRIEF FOR APPELLEES: Glenn A. Cohen Paul Hershberg Louisville, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE OLU A. STEVENS, JUDGE
ACTION NO. 00-CI-007628
OPINION
AFFIRMING
BEFORE: KELLER, STUMBO AND THOMPSON, JUDGES. STUMBO, JUDGE: Steven Craig Schwartz appeals from an Opinion and Order of the Jefferson Circuit Court dismissing with prejudice Schwartz's claim of breach of fiduciary duty and other claims against Daniel K. Coyle and American Scale Corporation. Schwartz argues that he was entitled to move forward with a shareholder derivative claim, that the court erred in ruling that his personal claim for breach of fiduciary duty was lost when he sold his shares of American Scale, and that his claims of wrongful discharge and intentional infliction of emotional distress were improperly dismissed. We find no error, and accordingly affirm the Opinion and Order on appeal.
Judge Michelle M. Keller concurred in this opinion prior to her appointment to the Kentucky Supreme Court. Release of this opinion was delayed by administrative handling.
This action has an extensive procedural history spanning more than 10 years, with multiple circuit court rulings having been rendered, and appeals having been prosecuted before the Kentucky Court of Appeals and Kentucky Supreme Court. In the interest of judicial economy, and as no good purpose is served by reconstructing the factual and procedural history which is already of record, we adopt the recitation of facts rendered by a panel of this Court in an Opinion rendered on March 26, 2004 (2002-CA-001287-MR). That panel stated in relevant part as follows:
American Scale Corporation, a closely-held Kentucky corporation with its principal place of business in Louisville, Kentucky, was incorporated in February 1985 [footnote omitted]. Coyle (president of American Scale) and Schwartz (vice-president of American Scale) were and are American Scale's sole shareholders. At the time of incorporation, Coyle and Schwartz each received 200 shares of stock in exchange for their capital contributions of $10,000.00.
In early March 1986 Schwartz was involved in an automobile accident in which his passenger was seriously injured. Schwartz's passenger filed suit against American Scale, since it was the party that had provided insurance coverage on Schwartz's vehicle. Following the accident, Coyle became concerned that Schwartz's activities would expose American Scale to further
liability. As a result, Coyle informed Schwartz that he no longer desired to be in a 50-50 shareholder relationship with him. Coyle told Schwartz that unless Schwartz agreed to transfer 1% of his shares to Coyle, thereby permitting Coyle to assume majority control of American Scale, Coyle would either seek a dissolution of American Scale, or withdraw and begin operating a business in competition with American Scale.
On March 21, 1986, Coyle and Schwartz executed a share-transfer agreement wherein Schwartz transferred 1% of his American Scale shares to Coyle. The agreement specifically stated that Coyle would thereafter own a 51% interest in American Scale, leaving Schwartz as owner of the remaining 49% of American Scale's shares.
Approximately two years later, on August 25, 1988, Coyle and Schwartz executed a written "Stockholders' Cross-Purchase Agreement." The cross-purchase agreement provided a mechanism for the repurchase of a shareholders' stock in the event of death, disability, or voluntary withdrawal of that shareholder. Specifically, the agreement stated that if Coyle or Schwartz died, or otherwise attempted to dispose of their shares, the other shareholder would have the right to purchase those shares (share-transfer restriction). In addition, the cross-purchase agreement gave the majority shareholder an option to purchase all of the minority shareholder's stock at any time upon 60-days written notice (majority-purchase option).
With respect to both the share-transfer restriction and the majority-purchase option, the agreement provided a stock-valuation method for determining a per share price in the event either of the provisions were triggered. The stock valuation provision of the cross-purchase agreement read in pertinent part as follows:
Unless altered as herein provided, for the purpose of determining the purchase price to be paid for the stock of a Stockholder, the
fair market value of each share of stock shall be, as of [August 25,1988], $250.00.Over the course of the next 12 years, neither Coyle nor Schwartz ever initiated proceedings to revaluate the price of American Scale's shares as provided in the cross-purchase agreement. Hence, the initial price of $250.00 per share was never revalued pursuant to the cross-purchase agreement.
The Stockholders shall redetermine the value of the stock within 60 days following the end of each fiscal year. . . . If the Stockholders fail to make the required annual redetermination of value for a particular year, the last previously recorded value shall control.
In a letter dated November 20, 2000, Coyle informed Schwartz that he was exercising the majority-purchase option. The letter stated, inter alia, that "the purchase price to be paid for [Schwartz's] stock [was] $250.00 per share." On November 27, 2000, after refusing to tender his shares to Coyle for the price specified in Coyle's letter, Schwartz filed a complaint in the Jefferson Circuit Court, naming Coyle and American Scale as defendants. Schwartz sought an order compelling Coyle and American Scale to allow Schwartz to inspect various books and records of the corporation. On November 29, 2000, Schwartz filed an amended complaint seeking, among other things, a declaration of rights regarding the validity of the cross-purchase agreement as a whole or any part thereof.
On January 24, 2001, Coyle filed an answer to Schwartz's amended complaint, and added a counterclaim for a declaration of rights and specific performance. In his counterclaim, Coyle asked for an order compelling Schwartz to transfer all of his shares to Coyle at a price of $250.00 per share. Over the course of the next several months, Coyle filed a motion for summary judgment and Schwartz filed a motion for partial summary judgment. In Coyle's motion for
summary judgment, he sought, inter alia, a determination that the parties' March 21, 1986, share-transfer agreement and August 25, 1988, cross-purchase agreement were valid and enforceable. Coyle also sought an order compelling Schwartz to transfer his shares to Coyle at a price of $250.00 per share pursuant to the cross-purchase agreement. In Schwartz's motion for partial summary judgment, he sought a determination that the stock valuation provision, which listed a stock price of $250.00 per share, was unenforceable as a penalty.
On December 12, 2001, after a significant amount of discovery had taken place, the trial court entered an order addressing the pending cross-motions for summary judgment. The trial court ruled that the parties' March 21, 1986, share transfer agreement was supported by valuable consideration, and was therefore enforceable. Hence, the trial court found that Coyle was the majority shareholder of American Scale (owner of 51% of the stock) and that Schwartz was the minority shareholder (owner of 49% of the stock).
Further, the trial court ruled that the parties' August 25, 1988, cross-purchase agreement was valid, and that Coyle, as majority shareholder, had the right under the majority-purchase option to buy all of Schwartz's stock upon proper written notice. However, the trial court found that forcing Schwartz to sell all of his stock at the price of $250.00 per share would constitute a penalty. Thus, the trial court ruled that the stock-valuation provision listing a price of $250.00 per share was unenforceable, and ordered that a current valuation of the stock must be undertaken before Schwartz could be compelled to transfer his shares. Therefore, Coyle's motion for summary judgment was granted in part and denied in part, and Schwartz's motion for partial summary judgment as to the validity of the stock-valuation provision was granted.
On December 21, 2001, Coyle filed a motion to alter, amend, or vacate that portion of the trial court's order which held that Coyle could not compel Schwartz to
transfer his stock at the price of $250.00 per share. On March 4, 2002, the trial court entered an order denying Coyle's motion to alter, amend, or vacate. On March 7, 2002, Coyle filed a motion to certify the trial court's December 12, 2001, and March 4, 2002, orders as final and appealable under CR 54.02. A hearing on this motion was held on April 25, 2002, after which the trial court entered an order granting Coyle's motion to certify on May 15, 2002. Coyle's appeal and Schwartz's cross-appeal followed.
The previous panel of this Court went on to conclude that the share-transfer agreement and cross-purchase agreement were valid and enforceable, thereby affirming that portion of the trial court's order granting Coyle's motion for summary judgment on those issues. The panel also found that the stock-valuation provision was enforceable, and it reversed that portion of the trial court's order granting Schwartz's motion for partial summary judgment on that issue. The practical effect of this ruling was that Schwartz was obligated to sell all of his stock to Coyle for $250 per share. Discretionary review was denied by the Kentucky Supreme Court and the matter was remanded to the trial court.
On remand, the following claims remained viable: 1) a wrongful discharge claim by Schwartz against American Scale, 2) a shareholder derivative claim by Schwartz for breach of fiduciary duty, 3) a claim by Schwartz against Coyle for breach of fiduciary duty, and 4) Schwartz's claim against Coyle for intentional infliction of emotional distress. Coyle subsequently moved for summary judgment. By way of an Opinion and Order rendered on June 16, 2010, the trial court dismissed the wrongful discharge and shareholder derivative claims, and denied the motion as to the direct action for breach of fiduciary duty and intentional infliction of emotional distress claims.
The matter continued in Jefferson Circuit Court, whereupon Coyle again moved for summary judgment on the two remaining claims. On November 30, 2011, the court rendered an Opinion and Order granting the motion and dismissing the remaining claims. As a basis for the order, the court found that a shareholder does not have a personal or individual right of action for damages based solely upon an alleged injury to a corporation. It noted that Schwartz claimed that Coyle misappropriated corporate opportunities and that the misappropriation resulted in harm to Schwartz's personal interest. Ultimately, the court found that Schwartz failed to cite any independent injury that would not be considered an injury to the corporation, and because Schwartz received $250 per share for his interest per the buy/sell agreement, Schwartz received the full value of his shares and this payment satisfied his personal interest. This appeal followed.
As noted below, the Opinion and Order did not expressly dismiss the claim of intentional infliction of emotional distress; however, the parties agree that it was dismissed by implication and reference to the entirety of the pleadings.
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Schwartz now argues that the trial court erred in dismissing the shareholder derivative claim, his personal claim for breach of fiduciary duty, and the wrongful discharge and intentional infliction of emotional distress claims. On the shareholder derivative claim, Schwartz directs our attention to KRS 271B.7-400 for the proposition that a plaintiff has standing to maintain a derivative action on behalf of the corporate entity if, 1) the plaintiff was a shareholder at the time of the transaction complained of, 2) the plaintiff fairly and adequately represents the interests of similarly situated shareholders in enforcing the rights of the corporation, and 3) the plaintiff pled with particularity the demand made upon the corporation's board of directors to obtain action, or, if no demand was made, why such demand was not made. Schwartz contends that he met each of these elements, and that the Jefferson Circuit Court erred in failing to so rule.
In Bacigalupo v. Kohlhepp, 240 S.W.3d 155 (Ky. App. 2007), the plaintiffs prosecuted a shareholder derivative action on behalf of the corporation alleging that corporate officers and the board of directors breached a fiduciary duty resulting in pecuniary loss to the corporation. During the pendency of an appeal in that case, the corporation merged with another corporation resulting in the plaintiffs no longer retaining stock in the original corporation. This court held in relevant part that continuous ownership by a shareholder is necessary to prosecute a derivative action under KRS Chapter 271B.
It is upon this holding that the Jefferson Circuit Court relied on in determining that Schwartz, who had years earlier sold his stock in American Scale, could not maintain the derivative action. Schwartz argues that the instant facts are distinguishable from those of Bacigalupo in that the American Scale stock was repurchased by an individual (Coyle) rather than by the corporation as in Bacigalupo. It is upon this distinction that Schwartz maintains Bacigalupo is not applicable and that the Jefferson Circuit Court erred in failing to rule.
We are not persuaded by this argument. Bacigalupo does not hold that a derivative action may be maintained where the plaintiff divests his stock interest in favor of an individual rather than the corporate entity. Rather, the controlling point of Bacigalupo is whether the plaintiff retains standing to represent the corporation's interests. In the matter at bar, as in Bacigalupo, the person or persons seeking to prosecute the action on behalf of the corporation lost their standing to represent the corporation when they divested themselves of the ownership interest. We cannot conclude that the Jefferson Circuit Court misapplied Bacigalupo, and accordingly find no error on this issue.
Schwartz's second argument is that the circuit court erred in ruling that his personal claim for breach of fiduciary duty was lost when he was paid for his shares of American Scale. He contends that as a result of the special relationship between corporate shareholders in a closely held corporation, and as this relationship gives rise to fiduciary duties, these obligations are independent of any other duty owed to the corporation. We find persuasive the Jefferson Circuit Court's reasoning on this issue. A shareholder does not have a personal or individual right of action for damages based solely upon an alleged injury to a corporation. Miller v. Paducah Airport Corp., 551 S.W.2d 241 (Ky. 1977); 2815 Grand Realty Corp. v. Goose Creek Energy, Inc., 656 F.Supp.2d 707 (E.D. Ky. 2009). Schwartz's personal interest in American Scale was previously adjudicated to be $250 per share per the terms of the parties' buy/sell agreement. Schwartz received the full value of his shares, and as the trial court properly found, this satisfied his personal interest.
Schwartz next argues that the trial court erred in dismissing his wrongful discharge claim. While acknowledging that Kentucky is an at-will employment state, Schwartz contends that his discharge from employment was improper and actionable because it resulted from his effort to assert a statutorily-protected right to inspect corporate records pursuant to KRS 271B.16-040. In dismissing Schwartz's wrongful discharge claim, the circuit court determined that KRS 271B.16-040, which grants a shareholder the right of inspection, also expressly provides a remedy to a shareholder aggrieved by a corporation's refusal to permit an inspection. Since the statutory scheme provides its own remedy (i.e., court ordered inspection of records plus costs and attorney fees), the circuit court concluded that KRS 271B.16-040 could not form the basis for the additional remedy under wrongful discharge. This conclusion is supported by Gryzb v. Evans, 700 S.W.2d 399 (Ky. 1985), upon which the circuit court relied; therefore, we find no error in the dismissal of Schwartz's wrongful discharge claim.
Lastly, Schwartz briefly argues that the circuit court erred in dismissing his claim of intentional infliction of emotional distress. Schwartz notes that under Kentucky law, a claim for intentional infliction of emotional distress exists where the defendant 1) intentionally or recklessly engages in 2) extreme or outrageous conduct 3) that proximately causes 4) severe emotional distress. Craft v. Rice, 671 S.W.2d 247 (Ky. 1984). The entirety of Schwartz's argument on this issue is that, "[t]here is no question that when the facts of this case are reviewed . . . sufficient evidence exists from which a jury could conclude that Coyle engage [sic] in outrageous conduct which damaged Schwartz."
We must first note that the apparent dismissal of this cause of action by way of summary judgment is not expressly found in the record. On June 15, 2010, the court denied Coyle's first motion to dismiss Schwartz's claims of breach of fiduciary duty and intentional infliction of emotional distress. Coyle later renewed that motion, resulting in an Opinion and Order rendered on November 11, 2011, wherein the court "ORDERED AND ADJUDGED that Schwartz's remaining claim based on breach of fiduciary duty is DISMISSED WITH PREJUDICE. This is a final and appealable Order[.]" Thus, on November 11, 2011, the court dismissed what it characterized as Schwartz's "remaining claim" having never addressed or otherwise dismissed the claim of intentional infliction of emotional distress.
The parties agree that Schwartz's claim of intentional infliction of emotional distress was in fact dismissed either by implication or by way of a general reference to the pleadings wherein the court did expressly dismiss Schwartz's "remaining claim". We accept the parties' contention that the claim of intentional infliction of emotional distress was dismissed by operation of the November 29, 2011 Opinion and Order, albeit only by implication, as the court's dismissal of the "remaining claim" evinced its conclusion that all prior claims were previously dismissed.
Additionally, we cannot conclude that Schwartz preserved this argument for appellate review. CR 76.12. He claims that preservation may be found in his response to Coyle's first motion for summary judgment which resulted in the court denying the motion on the breach of fiduciary duty and intentional infliction claims. Additionally, Schwartz argues that a post-hearing brief found at p. 1341 of the record operates to preserve this claim of error, but that brief does not address the claim of intentional infliction of emotional distress other than to note that it was asserted in the complaint. Rather, the brief addresses a motion in limine related to Schwartz's claim of breach of fiduciary duty ("For all the aforementioned reasons, Plaintiff respectfully requests this Court to stand by its Order and Opinion entered on June 16, 2010, and DENY Defendants' Motion in Limine seeking to exclude evidence of Plaintiff's personal damages at issue respecting his breach of fiduciary duty claim."). Lastly, Schwartz maintains that his filing of the Notice of Appeal serves to preserve the instant claim of error.
In seeking to make sense of this ball of string, we must conclude that even if this issue is preserved for appellate review (though it was never ruled on below and therefore there is nothing to preserve), and if the circuit court sustained by implication Coyle's motion for summary judgment as to Schwartz's claim of intentional infliction of emotional distress, the burden nevertheless rests with Schwartz to overcome the strong presumption that the trial court's rulings are correct. City of Jackson v. Terry, 302 Ky. 132, 135, 194 S.W.2d 77, 78 (1946) ("The presumption is that a trial court . . . renders the correct judgment under the facts developed before it."). Schwartz has not met the burden of overcoming this presumption. Additionally, the burden rested with Schwartz as the aggrieved party to move for additional findings or rulings to supplement the record, and/or to produce a record sufficient to support his claim of error. Burberry v. Bridges, 427 S.W.2d 583 (Ky. 1968). We find no error in the circuit court's implicit dismissal of Schwartz's claim of intentional infliction of emotional distress.
For the foregoing reasons, we affirm the Opinion and Order of the Jefferson Circuit Court.
KELLER, JUDGE, CONCURS.
THOMPSON, JUDGE, CONCURS AND FILES SEPARATE OPINION.
THOMPSON, JUDGE, CONCURRING: Reluctantly, I concur. I have no doubt that a grave injustice has occurred to the appellant by the forced sale of his interest in American Scale Corporation for much less than the consideration deserved.
However, I am bound by the law of the case in this Court's Opinion rendered on March 26, 2004, and further, Schwartz was the cause of his own problems by execution of the contracts of March 21, 1986, and August 25, 1988. Therefore, I concur. BRIEFS FOR APPELLANT: David B. Mour
R. Kenneth Kinderman
Louisville, Kentucky
BRIEF FOR APPELLEES: Glenn A. Cohen
Paul Hershberg
Louisville, Kentucky